OCDE Rethinking Antitrust Tools For Multi Sided Platforms 2018

Rethinking Antitrust Tools
for Multi-Sided Platforms

2018
Rethinking Antitrust Tools for
Multi-Sided Platforms
2018
Please cite this publication as:
OECD (2018) Rethinking Antitrust Tools for Multi-Sided Platforms
www.oecd.org/competition/rethinking-antitrust-tools-for-multi-sided-platforms.htm
This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments
employed herein do not necessarily reflect the official views of the OECD or of the governments of its member countries or
those of the European Union.
This document and any map included herein are without prejudice to the status or sovereignty over any territory, to the
delimitation of international frontiers and boundaries and to the name of any territory, city, or area.
© OECD 2018
FOREWORD │3
Foreword
Digitalisation of the economy has, it seems, arrived in waves. In the first wave, the
internet allowed us to buy directly digital copies and physical products and services from
online stores, rather than physical ones. The second wave has seen the appearance of
online platforms, which assemble, search, review and match users with sets of products
and sellers. To do so platforms recruit at least two, but often three or more sets of users,
many of which value the platform not for its own qualities, but for the presence of others
upon it. We currently await the third wave, said to involve the direct transfer of not just
information, and hence digital copies, but also of value, in the form of unique digital
products and services over the internet. As more and more physical products and services
become largely digital in nature, the scale of this next change becomes ever more
important. While the payment systems used by platforms may face challenges, and
platforms themselves may change in nature, they seem likely to remain crucial to our
ability to interact within the digital economy.
Platforms are not a new business model, but rather an old one that has been rejuvenated
by the sheer scale and scope of the participants in digital economy. The complexity this
creates has renewed the need for, and the value in having a simple meeting place where
those interested in trading particular products and services can find one another, and
perhaps be entertained while doing so. It appears that users are not looking for a
particular seller, or someone that carefully selects and assures the quality of suppliers,
instead they crowdsource recommendations and ask only that they be able to search for,
or introduced by algorithm to, the best possible match.
Many digital marketplaces remain free to consumers, the market-makers having decided
against charging for entrance or use of their platform services, and instead to use the
available technology to monetise the information conveyed by users. While this was not
possible in the past, it is now, largely as a result of the ability to digitalise what we know
(the customer relationship), and the low value that users attach to the sharing of this
information. This does not mean competition is necessarily working effectively, however
nor does it mean that there is undetected anticompetitive conduct by firms. More likely,
the answer lies in consumers having greater awareness of the surplus that is generated,
and more effective tools to extract it from the market when prices hit zero.
To investigate whether the antitrust toolkit remains fit-for-purpose the OECD Competition
Committee held a Hearing in June 2017. This asked whether the tools traditionally used to
define markets, to assess market power and efficiencies, and to assess the effects of
exclusionary conduct and vertical restraints, remain sufficient to address those questions in
the context of these multi-sided platform markets. At the hearing a range of expert
economists from agencies, academia, and private practice were invited to make practical
methodological proposals on how these tools might need to be re-designed or re-interpreted
in order to equip competition agencies with the analytical tools they require when analysing
multi-sided platform markets. This report features each of the contributions made by those
experts (and their co-authors) along with an opening synthesis chapter by the OECD.
RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

4 │ FOREWORD
What we heard at the hearing was that platforms were different in nature from traditional
markets, and particularly that there were important demand externalities from one side of
the platform to the other (‘cross-platform network effects’) which if ignored could lead to
bad decision-making. However, we also heard that where these externalities were
recognised, the existing tools could be adjusted to account for them. Therefore, where
there is a plausible cross-platform network externality, the most important takeaway is for
competition agencies to consider the value of adopting a multi-sided approach, and to
explain the rationale when deciding not to do so.
In addition to this, there were a number of key messages. The first key message was that
market definition is a less valuable tool in these markets. Nevertheless, where it is a
requirement, rather than an analytical tool, the most effective framework remains the
hypothetical monopolist test, even in the presence of zero prices. On market power, we
heard two key messages. Firstly, that the more sophisticated tools need to be adjusted to
estimate the impact that a price rise on side A of the platform would have on: the demand
from users on side A; the demand from users on side B; and the price that is set on side B.
So for example, surveys and demand estimations need to estimate those elasticities.
Secondly, less sophisticated tools for measuring the market power of a platform also need
adjusting to reflect the existence of a second or third side. For example, shares of volume
on one side can only be interpreted in parallel with shares on the other side, and
profitability must be taken at a platform level and not on sales to just one side of the
market.
The key message on exclusionary conduct was that it should not be assumed to be
harmless simply on the basis that there was another side to the market. If anything
platform markets may provide particularly fertile ground for exclusionary behaviour and
so merit greater scrutiny. A second key message was that while the framework for
assessing the exclusionary effects of exclusivity clauses remains robust, price-cost tests as
a whole are not fit-for-purpose as a tool for identifying predatory pricing in these markets.
A proposed replacement was to consider whether the price would have made sense if it
did not weaken its rival. This might be tested by estimating elasticities and then removing
any substitution effects from the platform’s optimal price setting problem.
Finally, the analytical framework and tools used to analyse efficiencies and the effects of
vertical restraints on a case-by-case basis each remain effective. Indeed, there would
appear to be significant scope for efficiencies to arise in platform mergers to the extent
that they are necessary to combine separate user bases and increase interoperability.
Similarly, where cross-platform network effects are strong there may be a real risk that if
they have the opportunity, users on either side might free-ride and bypass the platform.
As a result there may be significant scope for vertical restraints imposed by the platform
to generate efficiencies by protecting its viability.
Frédéric Jenny
Chairman, OECD Competition Committee

TABLE OF CONTENTS │5
Table of contents
Foreword ................................................................................................................................................ 3
Part I. Introduction and key findings .................................................................................................. 9
1. What are multi-sided markets? Why are they different? ................................................................. 9
2. Market definition ........................................................................................................................... 12
3. Market power ................................................................................................................................. 16
4. Exclusionary conduct ..................................................................................................................... 21
5. Efficiencies .................................................................................................................................... 24
6. Vertical restraints ........................................................................................................................... 26
Notes .................................................................................................................................................. 29
References.......................................................................................................................................... 33
Part II. Market definition ................................................................................................................... 35
1. Market definition in multi-sided markets.................................................................................. 37
1. A working definition of a two-sided market .................................................................................. 37
2. A useful distinction among two-sided markets .............................................................................. 38
3. Assessing the two-sided nature of the market................................................................................ 39
4. Defining one or two markets.......................................................................................................... 41
5. Considering both sides of the market............................................................................................. 43
6. The SSNIP test and the HM test .................................................................................................... 45
7. Conclusions.................................................................................................................................... 49
Notes .................................................................................................................................................. 49
References.......................................................................................................................................... 53
2. Market definition in multi-sided markets.................................................................................. 55
1. Introduction.................................................................................................................................... 55
2. One single market vs. separate markets for distinct market sides.................................................. 56
3. Product market definition with multi-homing and single-homing ................................................. 60
4. Further challenges when applying traditional methods for market definition
in multi-sided markets ....................................................................................................................... 62
5. Conclusion ..................................................................................................................................... 64
Notes .................................................................................................................................................. 64
Part III. Market power ....................................................................................................................... 69
3. Measuring market power in multi-sided markets .................................................................... 71
1. Introduction.................................................................................................................................... 71
2. Features of multi-sided markets ..................................................................................................... 71
3. Practical steps when considering measuring market power in multi-sided markets ...................... 73
4. Measures of market power ............................................................................................................. 74
5. Assessing the strength and impact of indirect network externalities and feedback loops ............. 78
6. Conclusion ..................................................................................................................................... 80
Annex. Examples of cases assessing market power in multi-sided markets...................................... 81
Notes .................................................................................................................................................. 83

6 │ TABLE OF CONTENTS
4. Measuring market power in multi-sided markets .................................................................... 87

1. Introduction.................................................................................................................................... 87
2. Market power in one-sided markets ............................................................................................... 88
3. Market power in multi-sided markets ............................................................................................ 91
4. Measurement issues in multi-sided markets .................................................................................. 93
5. Concluding remarks ....................................................................................................................... 95
Notes .................................................................................................................................................. 96
References.......................................................................................................................................... 99
Part IV. Exclusionary conduct ......................................................................................................... 101
5. Exclusionary conduct in multi-sided markets ......................................................................... 103
1. Introduction.................................................................................................................................. 103
2. Conceptions of exclusionary behaviour ....................................................................................... 105
3. Predatory pricing in a multi-sided market ................................................................................... 107
4. Creating barriers to multi-homing ............................................................................................... 114
5. Conclusion ................................................................................................................................... 121
Appendix.......................................................................................................................................... 122
Notes ................................................................................................................................................ 122
References........................................................................................................................................ 127
6. Exclusionary practices and two-sided platforms .................................................................... 131
1. Introduction.................................................................................................................................. 131
2. A close-up on exclusionary pricing in multi-sided platforms ...................................................... 132
3. Policy ........................................................................................................................................... 143
4. Conclusions.................................................................................................................................. 146
Notes ................................................................................................................................................ 146
Part V. Efficiencies ............................................................................................................................ 149
7. Quantifying horizontal merger efficiencies in multi-sided markets:
An application to stock exchange mergers .................................................................................. 151
Abstract ............................................................................................................................................ 151
1. Introduction.................................................................................................................................. 151
2. The creation of Euronext ............................................................................................................. 154
3. An econometric analysis of Euronext bid-ask spreads ................................................................ 155
4. Robustness tests ........................................................................................................................... 159
5. The NYSE- Euronext merger....................................................................................................... 161
6. Identification and causality .......................................................................................................... 161
7. Concluding remarks ..................................................................................................................... 163
Annex A. Descriptive statistics ........................................................................................................ 165
Annex B. List of events ................................................................................................................... 166
Annex C. Dataset description .......................................................................................................... 167
Annex D. Econometric results – Baseline ....................................................................................... 168
Annex E. Econometric results – Robustness ................................................................................... 171
Annex F. Impact of the NYSE-Euronext merger ............................................................................. 180
Annex G. Possible omitted variables ............................................................................................... 181
Notes ................................................................................................................................................ 186

TABLE OF CONTENTS │7
8. Network effects and efficiencies in multi-sided markets ........................................................ 189

1. Relationships and network effects across multi-sided platforms ................................................. 189
2. Accounting for efficiencies on all sides of the platform .............................................................. 192
3. Conclusion ................................................................................................................................... 195
Notes ................................................................................................................................................ 196
Part VI. Vertical Restraints .............................................................................................................. 199
9. Suggestions for competition authorities when assessing vertical restraints
in multi-sided platforms ................................................................................................................ 201
1. Preliminaries: when should we apply the economics of platforms? ............................................ 201
2. Assessing the anticompetitive effects of vertical restraints in platforms ..................................... 203
3. Assessing the procompetitive effects of vertical restraints in platforms...................................... 207
Notes ................................................................................................................................................ 208
10. The competition analysis of vertical restraints in multi-sided markets .............................. 213
1. Introduction.................................................................................................................................. 213
2. Multi-sidedness and vertical contracting ..................................................................................... 214
3. Contract incompleteness motivates vertical restraints also in multi-sided markets ..................... 215
4. The competition assessment of vertical restraints in a multi-sided environment appears more
complex, but it is not fundamentally different ................................................................................. 218
5. Systematic dismissal of efficiencies is the major outstanding issue ............................................ 219
6. Focus on short term price effects vs dynamic effects has long term costs .................................. 220
7. Practical analytical map for antitrust analysis.............................................................................. 221
8. Conclusions.................................................................................................................................. 227
Notes ................................................................................................................................................ 227

PART I. INTRODUCTION AND KEY FINDINGS │9
Part I. Introduction and key findings
By Chris Pike *
Since the turn of the century, economists have understood that multi-sided markets
function in ways that are importantly different from standard markets. Since the ground-
breaking work on the topic by Rochet & Tirole, huge progress has been made in
modelling these markets and the way they work, and identifying the mistakes that can be
made by treating them as traditional markets.1 Naturally, this has consequences for the
way in which competition agencies analyse these markets, and hence on whether, and if
so how, they decide to intervene in these markets. The speed and extent of growth in the
digital economy in over this same period has made this one of the most important,
pressing and analytical challenges that competition agencies now face. This is because
much of that digital growth has been driven by the appearance and expansion of
globalised platforms that disintermediate standard markets and directly connect users,
transforming them into more complex multi-sided markets.
In June 2017, the OECD Competition Committee held a Hearing that looked at whether
the tools traditionally used to define markets, to assess market power and efficiencies, and
to assess the effects of exclusionary conduct and vertical restraints, remain sufficient to
address those questions in the context of multi-sided markets. It then invited practical
methodological proposals from a range of expert economists from agencies, academia,
and private practice on how these tools might need to be re-designed or re-interpreted in
order to equip competition agencies with the analytical tools they require when analysing
multi-sided markets.
1. What are multi-sided markets? Why are they different?
While economists typically referred to “two-sided markets” to begin with, we here follow
the recent trend by referring here to “multi-sided platforms”. 2 We do so for two reasons.
Firstly, it helpfully distinguishes between the product of the firm (the platform), and the
*
This paper was prepared by Chris Pike, Competition expert at the OECD Competition Division,
with invaluable comments from Antonio Capobianco, Pedro Gonzaga and Antonio Gomes. The
opinions expressed and arguments employed herein do not necessarily reflect the official views of
the Organisation or of the governments of its member countries. All documents related to this
hearing can be found at www.oecd.org/daf/competition/rethinking-antitrust-enforcement-tools-in-
multi-sided-markets.htm. The experts at the hearing were: Lapo Filistrucchi, Arno Rasek (with co-
author Sebastian Wismer), Kurt Brekke, Kate Collyer (with co-authors Hugh Mullan and Natalie
Timan), Michael Katz, Tommaso Valletti (with co-authors Andrea Amelio and Liliane Karlinger);
Jorge Padilla (with co-author Enrique Andreu), Howard Shelanski (Samantha Knox and Arif Dhilla),
Paul Johnson, and Cristina Caffarra (with co-author Kai-Uwe Kühn). Except where indicated, the
conclusions reached in this paper do not necessarily reflect the views of these experts. The experts
were provided with an opportunity to clarify any views that are attributed to them.

10 │ PART I. INTRODUCTION AND KEY FINDINGS
relevant market, or markets, in which the platform operates. Secondly, it accounts for the
fact that while the multi-dimensionality begins with two-sidedness (in which consumers
and sellers meet on a platform), this is only the beginning, and many of these markets
have three sides (consumers, content suppliers, and advertisers) and some even have four
(for example in payment cards) or more.
Examples of multi-sided platforms abound: TV and newspapers that connect viewers and
advertisers; payment cards that connect card holders, merchants, card-issuing banks and
acquiring banks; stock exchanges that connect buyers and sellers; shopping centres that
connect retailers with shoppers; digital platforms that connect users, content providers
and advertisers; listings magazines/directories that connect businesses and customers;
estate agents that connect house sellers and house buyers; and telecom networks that
connect fixed and mobile phone users. They might also be thought to include hospitals
that connect physician groups with health insurers (and even health insurers that connect
hospitals and patients), banks that connect depositors and savers, and supermarkets that
connect producers and shoppers.
There are various definitions of the multi-sided markets in which multi-sided platforms
compete, however, most share the same basic elements, and can be captured as follows: a
market in which a firm acts as a platform and sells different products to different groups
of consumers, while recognising that the demand from one group of customer depends on
the demand from the other group(s). 3 Crucially, if this cross-platform network externality is
present,4 this implies that the structure of prices that the platform sets will determine
volume, not just the level at which it sets the price across the different sides of the market. 5
While the existence of a cross-platform network externality is binary, there was common
agreement amongst experts at the Hearing that there is little value in using this as the
distinguishing feature of a multi-sided platform for antitrust purposes. This is because it is
the magnitude of the cross-platform network externality that determines how big a
mistake it is to overlook it and treat the product as one-sided. Therefore, while a wider set
of markets may exhibit small cross-platform network externalities, the externalities will
only be large enough to be important for the analysis in a smaller set of markets.
Using a bright line to identify when to use a multi-sided approach therefore risks
overcomplicating the assessment of what are, in effect, one-sided markets. However, the
alternative conclusion that ‘multi-sidedness matters when it matters’ means that the multi-
sidedness of a market may depend on the nature of the investigation. For example, the
platform nature of a supermarket may not matter in the context of a local supermarket
merger where the impact on suppliers might be minimal given the level at which supplier
decisions are taken and simple quality measures such as the range of products that are
offered to consumers may suffice. However, if the investigation is into the
anticompetitive nature of ‘slotting fees’ charged by supermarkets to suppliers for greater
prominence on its shelves, then a multi-sided perspective might help explain the rationale
for the practice and hence be invaluable to the analysis. Therefore, where there is a cross-
platform network externality, the value of adopting a multi-sided approach should at least
be considered, and the rationale for deciding not to do so explained.
There are also some important differences between different types of multi-sided
platforms. The first is between those platforms that can observe when a transaction is
taking place on the platform and those that cannot. Where the platform can observe a
transaction, it may charge a price for it if the externality derives from additional use of the
platform by other sides, rather than solely from additional membership. This might be
instead of, or in addition to, any subscription fee that it sets for members.

PART I. INTRODUCTION AND KEY FINDINGS │ 11
Within the category of non-transaction platforms, we can think of there being non-
transaction matching platforms, and non-transaction audience-providing platforms. For
example, where the cross-platform network externality is positive on both sides and the
objective of the platform and all users is to find the best possible match, Rasek & Wismer
describe a platform as a matching platform (Shelanski, Knox & Dhilla refer to these as
service-based platforms). A matching platform can be a transaction matching platform if
the transaction is observable (e.g. uber, stock exchanges), but if it is not observable then it
can be considered a non-transaction matching platform (e.g. dating apps, real estate
platforms, Wikipedia).
If the externality runs in just one direction, Rasek & Wismer consider the platform an
audience-providing platform (Shelanski, Knox & Dhilla identify these as subsidy-based
platforms). We can think of these audience-providing platforms as being either
transaction or non-transaction platforms depending on whether the transaction is
observable or not. Typically, an advertising platform (e.g. newspapers) will not be able to
observe the transaction (whether the advert resulted in a sale to a specific customer).
However this is already changing in online advertising where a purchase can be traced
using the trail that is created when a consumer clicks through from an advert and makes a
purchase. In that case, the effect of the advert may become observable to the platform,
which in turn allows it to charge for a commission on the follow-on transaction.
While a two-sided market can be categorised using these distinctions, as Shelanski, Knox
& Dhilla point out, many digital platforms are three-sided and so can be characterised
both as matching two sides that each generate positive externalities (users and content
providers), whilst also providing an audience for a third side that might not deliver
positive externalities (advertisers). The transactions between these three sides may all be
observable or none of them might be.
The nature and strength of the cross-platform network effects is therefore more important
to the analysis than the category of platform. For example, the consequences of some
platforms’ actions can be much greater than they appear at first sight. For example, when
a strong cross-platform network externality exists on more than one side of the market,
this creates feedback loops. In these loops, an action can trigger a spiral of reactions,
which, as in a multiplier effect, increase the magnitude of the consequences of the action.
As an example, increasing the price that users pay might reduce the number of users, but
this may also reduce the value of the platform to advertisers and hence reduce the amount
that advertisers are willing to pay. In turn, this may reduce the return that content
providers earn when their content is viewed on the platform, thereby reducing the amount
or quality of content, which may reduce the number of users. Once again, this may then
reduce the amount that advertisers are willing to pay, and so forth. Each action the
platform takes can therefore create a series of reactions (a ripple effect). If these effects
go far enough they may tip the firm towards failure on the one hand, or dominance
(monopoly) on the other.

Box 1. Summary on the nature of multi-sided markets
There are various definitions of the multi-sided markets in which multi-sided

platforms compete, however, most share the same basic elements, and can be
captured as follows: a market in which a firm acts as a platform and sells different
products to different groups of consumers, while recognising that the demand
from one group of customer depends on the demand from the other group(s).
While the existence of a cross-platform network externality is binary, there is
common agreement amongst experts at the Hearing that there is little value in
using this as the distinguishing feature of a multi-sided platform for antitrust
purposes. Nevertheless, where there is a cross-platform network externality, the
value of adopting a multi-sided approach should at least be considered, and the
rationale for deciding not to do so explained
There are differences between different types of multi-sided platforms. The first is
between those platforms that can observe when a transaction is taking place on
the platform and those that cannot. A further distinction is between non-
transaction platforms that match users, and non-transaction platforms that provide
content to some users and access to an audience for other users.
Despite the differences, the nature and strength of the cross-platform network
effects is more important to the analysis than the category of platform. For
example, a strong cross-platform network externality that exists on more than one
side of the market creates feedback loops that can mean the consequences of the
platforms’ actions are much greater than they might appear at first sight.
2. Market Definition
A traditional starting point for framing an analysis of the competitive effects of a merger,
an action or an agreement is to define the relevant market(s) that might be affected. This
can help to identify demand and a set of relevant competitors. However, when a merger,
action or agreement involves either a multi-sided platform, or a firm that trades with a
multi-sided platform, there is a preliminary question of how many markets to define. For
multi-product or multi-location firms, the answer is the result of the market definition
exercise, which identifies the scope of the market, and hence whether those different
products and locations fall within the same or different markets. In contrast, for multi-
sided platforms, the product that a platform provides to one side of the market does not
compete with the product it provides to another side. In the case of multi-sided markets
the question of how many markets to define cannot be answered within a market
definition exercise, instead it is a conceptual question that requires an answer before any
exercise to define the scope of the market can be carried out.
How many markets to define?

Filistrucchi suggests that one multi-sided market should be defined only in the case of
platforms that compete in ‘transaction markets’. In these markets, a platform sells the
ability to find a match and transact with another side of the market (e.g. Airbnb). The
product is the transaction, and this is the same product offered to each side (and in fixed
1:1 proportions, so one side can only transact if someone on the other side transacts with

it). In cases where platforms compete in non-transaction markets, he suggests defining

two ‘interrelated’ markets.
However, as noted by Rasek & Wismer and others, non-transaction markets include
different types of multi-sided market. There appears, for example, to be agreement that in
those types of markets where the cross-platform network externality is positive for just
one side (e.g. media markets), it makes sense to define two ‘interrelated’ markets. In
those cases, the product offered to each side is very different. For example, in newspapers
this might be a market for printed content (a reader market), and a market for attention
(an advertising market).
In addition, there are also non-transaction matching markets. These might be funded
through advertising (effectively creating a third side to the market), or they might be
funded through subscription fees. The product on offer to the two sides is the opportunity
to find a match, though not to transact (see for example a dating application, a social
network where different user groups interact, or a marketplace application like craigslist).
In this case, the platform does not offer a transaction to either side as its product (since it
cannot observe whether a transaction takes place or not and hence cannot charge for it).
Instead the product that it offers to both sides is the opportunity to find a match (and
hence to transact off-platform). In these cases it would appear that, if a market were to be
defined, it would be a single two-sided market. However, where the matching platforms
are funded by advertising, this third side (advertisers) might be identified as a distinct
market that is interrelated with the two-sided matching market.
One might ask whether it really matters whether we define a two-sided market or two
‘interrelated’ markets, as long as we identify that these each require an analysis of the
interrelationship, and hence recognise that each differs from a traditional one-sided
market. For the purposes of a competitive assessment that is right.6 Analysing the
interrelationship is unavoidable since running a simple one-sided market definition
analysis would ignore the fact that the profit the platform loses when a reader switches is
magnified by the reaction of advertisers to that decision. 7 In contrast, market definition is
often unnecessary and can be counterproductive. 8 Rasek & Wismer suggest that in multi-
sided markets market definition in itself may be less informative than in one-sided
markets. Therefore, provided the competitive effects analysis examines the
interrelationship between the different sides or markets, the framing of the market
definition as a multi-sided market or as multiple interrelated markets, or indeed the
absence of a market definition, need not distort the conclusion.
However, whether the relevant market is two-sided or consists of two interrelated markets
may make an important difference in a legal sense in some jurisdictions. For example, as
Katz notes, in the US the question of whether or not efficiencies on one side of the market
are weighed against an identified loss of competition on the other side might depend
crucially on whether these are considered to be two sides of the same market, or
interrelated but distinct markets. Where two interrelated markets are defined, efficiencies
on either market would, if verified, be relevant to the economic assessment (since they
would be expected to affect the other market). However, where two interrelated markets
are identified, efficiencies would typically need to accrue within the same market as the
loss of competition in order to affect the outcome of the case. 9 Therefore, where cross-
platform network effects are important, and a market definition is required, defining a
single two-sided market would ensure that the assessment as a whole is based on the full
set of possible competitive and efficiency effects, and that no effect is arbitrarily

excluded. Notably this would mean that non-transaction platforms would be defined as
competing in a single two-sided market rather than two interrelated markets.
How to define the market(s)?

In principle, the framework of the hypothetical monopolist test can still be used in multi-
sided markets. Filistrucchi explains that in many cases, this can still be framed as a
SSNIP test (a Small but Significant Non-transitory Increase in Price). 10 For example,
where a single multi-sided market for transactions is to be defined, a SSNIP test can be
used to identify the scope of that market even if one side faces a zero price. This is
because the zero price is just one element of a price structure that the platform sets for its
single product (the transaction). A small but significant increase in the total price of the
transaction is therefore still a meaningful concept (since such an increase is not infinite in
the way that a lifting a zero price would be), and the profitability of such an increase can
therefore still be examined.
Similarly, where two interrelated markets are to be defined, a zero price in one market
does not prevent the other interrelated market being defined via a SSNIP test. It is true
that the scope of the zero price market cannot itself be defined by a SSNIP since any
change in price would be infinitely large. However, as Filistrucchi suggests, a SSNDQ
test (Small but Significant Non-transitory Decrease in Quality) can still be applied, as
indeed it might in any of the other scenarios where a SSNIP is the default tool. This is
because the hypothetical monopolist test is a test of the profitability of a marginal
degradation of value offered, and not of price alone. 11
However, as is often the case in one-sided markets, the difficulty is in operationalising the
SSNIP (or SSNDQ) test. In particular, Rasek & Wismer note that it may not be possible
to implement the test due to reliable data being unavailable. Reformulated expressions for
the SSNIP test have been developed by Filistrucchi et al (2014) to allow for application
within multi-sided markets.
While these expressions appear more complex, the required inputs are in fact largely the
same as those required to implement a standard SSNIP test. The additional requirement is
an estimate of the cross-platform network effects 12, which is in any case required in the
subsequent assessment of market power.
This effect cannot be ignored because it changes the profitability of the price increase,
and can therefore change the conclusion of the SSNIP test on the scope of the relevant
market. This is the case both for positive and negative cross-platform network effects. For
example, if readers dislike adverts, then a price increase by a hypothetical monopolist
might reduce readership and make the newspaper less attractive to advertisers, but less
adverts would attract additional readers. The price increase would therefore be more
profitable than if the reader were indifferent to adverts. Furthermore, even if readers are
entirely indifferent to adverts, the impact that increasing the cover price and reducing
readership has on profits from advertising, as well as on sales of the newspaper, need to
be taken into account when the SSNIP test is applied. 13
One important additional difficulty that is specific to multi-sided platforms is identified
by Filistrucchi. This is the need to re-optimise the balance of prices across the sides of the
market after the profitability of a SSNIP has been tested on each iterated candidate
market. In a traditional one-sided market, the issue does not arise, as there is only one
price. In contrast, on a multi-sided platform, there are at least two prices that might be
changed in order to increase profitability. A hypothetical monopolist might therefore

increase one and leave one unchanged (or vice-versa), it might increase one and reduce
the other (or vice-versa), or it might increase both.
The need to re-optimise means firstly that each iteration of the test on a candidate market
needs to be repeated for each of the ways in which the price(s) might be raised to increase
profitability. Furthermore, the optimal balance of prices might change as the scope of the
candidate market is expanded so the same three options might need to be tested at each
iteration.14 This introduces considerable additional complexity, and, if not tackled, would
lead, as Filistrucchi explains, to a bias that overestimates the size of the market that is
defined, thereby potentially underestimating the market shares of firms within that market.
It may therefore be the case that the complexities of applying the hypothetical monopolist
test are insurmountable, while the alternatives are undesirable. The first best solution in
such cases would be to leave the market undefined where possible. However, if defining a
market is unavoidable, and as is often the case, the SSNIP/SSNDQ test cannot be
operationalised, the best option is to use the hypothetical monopolist test as a framework
(or thought experiment) onto which qualitative evidence is applied (for example views on
substitutability from consumer groups, industry analysts or firms that are informed by
verified observations on previous experience). This prevents the exercise from slipping
into a characteristics-based process, which takes no account of substitutability.
Box 2. Summary of key considerations for market definition
There might be little value in carrying out a market definition exercise in markets
involving multi-sided platforms. Therefore, consider carefully whether a market
definition exercise is a necessary and proportionate use of resources.
When defining markets is an unavoidable requirement, first decide how many
markets to define;
• An assessment of the significance of the cross-platform network effect should
be used to identify those markets that should not be treated as traditional one-
sided markets.
• For the purposes of a competitive assessment there is little meaningful
distinction between defining a two-sided market and defining two interrelated
markets, as long as the effect of the cross-platform network effect is
recognised and analysed. However, in some jurisdictions the choice may
have an important effect on which efficiencies the legal analysis allows to be
weighed against any loss of competition that is identified. Therefore, where
cross-platform network effects are important, and a market definition is
required, defining a single two-sided market ensures that the assessment as a
whole is based on the full set of possible competitive and efficiency effects,
and no effect is arbitrarily excluded. Notably this means that non-transaction
platforms would be defined as competing in a single two-sided market rather
than two interrelated markets.
When defining the scope of the market(s);
• The framework of the hypothetical monopolist test provides a discipline that
helps guard against the adoption of a characteristics-based approach to
market definition.

• A SSNIP test should check the profitability of an increase in price on each

side of the market, as well as on the total price. Care must be taken to avoid
(or at least to identify) potential bias towards overly broad markets that may
arise if the hypothetical monopolist does not ensure it is setting the optimal
price structure at each iteration of the test.
• Where a platform operates in a single multi-sided market and sets a zero
price on one side of the market, a SSNIP test can be used (either as a
conceptual tool or in some cases as a test using the reformulated expressions
for the SSNIP test that have been developed).
• Where a platform operates in markets that are defined as interrelated and sets
a zero price in one market, a SSNIP test would involve an infinite price
increase and so a SSNDQ test can be used instead.
3. Market power
When measuring the market power held by a multi-sided platform, it is important to

recognise that cross-platform network effects can magnify the competitive constraints
that exist, while also raising a barrier to entry by potential rivals and restricting the
emergence of new competitive constraints.15 Consequently, as both Brekke and Collyer,
Mullan & Timan explain, those tools that seek to measure market power or changes in
market power by looking at consumer responsiveness (e.g. using tools based on
elasticities or diversion ratios), need to ensure they collect or estimate all the relevant
elasticities and diversion ratios. For example, this would need to include consumers’
response to changes in participation on the other side of the market. In contrast, other
tools that do not look at consumer responsiveness (for example market shares), do not in
themselves require an estimate of cross-platform network effects, though they are likely
to require some other adjustment or reinterpretation in order to reflect the existence of an
interrelated market or another side to the market. Moreover, an assessment that relies on
tools that do not look at consumer responsiveness will also need, at some stage, to reflect
on the impact that strong cross-platform network effects would have on the conclusions
that it draws from these tools. In any case, the interrelationship of pricing across the
platform, and the need to reflect this in whichever tools are used, means that is not
possible for a multi-sided platform to have market power on only one side of the market.
Either it has a degree of market power as a platform, or it does not. 16 It is therefore not
meaningful to conclude that a platform has market power on one-side of the platform.
Tools based on the responsiveness of demand

In a modern competitive effects analysis market power is typically assessed by looking at
the responsiveness of demand. For instance the size of the competitive constraint that is
lost from a merger can be seen in the strength of the cross elasticity of demand between
the merging firms’ products. Similarly, the own-price elasticity of demand helps inform a
view of the degree of market power that a particularly product holds. Where market
power is measured using tools that look at the responsiveness of demand, these will need
to be adjusted to reflect the impact of cross-platform network effects. This is because, as
noted, strong cross-platform network effects and feedback loops change the
responsiveness of demand. Failing to account for this change may therefore lead to a

misunderstanding as to the closeness of competition between two firms. Where cross-

platform network effects are strong, they therefore need to be estimated and then reflected
in the assessment of market power. 17 For other types of tool, including market shares,
profitability measures, and event studies, this estimation is not part of the tool, though
multi-sidedness matters in other ways (see below). Instead, the cross-platform network
effects might be reflected in the assessment after a preliminary analysis that recognises
these other aspects of multi-sidedness has been conducted, as Collyer, Mullan & Timan
suggest. In contrast, for tools based on the responsiveness of demand the estimation needs
to be integrated within the analysis from the beginning.
For instance, Brekke identifies that for merger analysis, adjusted versions of the upward
pricing pressure (UPP) index and generalised upward pricing pressure indicator (GUPPI)
tools have been developed and are available for Competition Authorities to use. 18 These
can be straightforward to use if estimates of elasticities and the cross-platform network
effects are available. However, the difficulty is in obtaining such estimates.
It is worth noting that obtaining estimates of cross-platform network effects is a challenge
that arises in both the market power and efficiencies assessments. It may therefore make
sense in multi-sided platform cases to consider collapsing the market power and
efficiencies assessments into a single exercise in which both the agency and the firm(s)
seek to quantify these cross-platform network effects.
Brekke explains that to calculate the adjusted UPP indices requires an understanding of
the full impact that a price rise on side A of the platform will have. This can be separated
into three effects: 1) the effect on demand from users on side A; 2) the effect on demand
from users on side B; and, 3) the effect on the price on side B. In each case the reverse is
also required, meaning there are six key inputs required for calculating the adjusted
indices.
• The first effect of a price rise on side A is that demand for A will fall. This effect
is simply the elasticity of side A’s demand with respect to the price of A, and so
this first effect is likely to be negative.
• The second effect of a price rise on side A is that demand for B will fall (as those
on side B respond to the reduced demand on side A). This effect is the elasticity
of side B’s demand with respect to the price of A. If the cross-platform network
externality is positive (e.g. buyers like there to be more sellers), this second effect
is likely to be negative.
• The third effect of a price rise on side A is that the price on side B will fall, which
increases demand for B and hence will also increase demand for A. The reason
that the price on side B falls, is that increasing the margin on side A increases the
incentive to raise participation on side B, since this extra participation attracts
more high-margin sales on side A. This effect is the elasticity of B’s price with
respect to the price of A (the rebalancing effect).19 If the cross-platform network
externality is positive, this third effect is likely to be positive, and therefore to
somewhat counteract the first and second effect. Overlooking this third effect may
therefore lead to overestimating the negative impact on volume of a price rise on
side A.
Where data (and time) permits, the relevant elasticities can be calculated through demand
estimation that looks at diversion ratios in response to small changes in price, quantity or
quality. 20 The data requirements for such exercises are however, challenging, and so as
Collyer, Mullan & Timan suggest, the use of surveys might present a more realistic
option than demand estimation in many contexts.

However, there are also challenges to using surveys, since identifying particular effects
while holding everything else constant may not be straightforward. For example, we
would need to assess the three effects set out by Brekke above. To assess the first effect,
Filistrucchi suggests that sellers (e.g. hotels) might be able to tell us how a change in
commission would affect their demand for the platform. However, consumers are
unlikely to be able to tell us how a change in the commission that sellers pay the platform
would affect their demand for the platform. In order to assess this second effect, we might
therefore need to ask how consumers’ demand for the platform would react to the change
in the number of sellers on the platform (or any change in sellers’ prices that is passed
through) when the commission increases. Fortunately, we should know this change from
the sellers’ response that we obtained when quantifying the first effect.
To estimate the third term (the rebalancing effect), a survey would also need to ask the
platform how it would change the price it charges consumers (or the quality it sets), if its
commission on sellers were to increase. However, there might be a question mark over
the platform’s incentive to provide a genuine estimate of this figure. It might therefore be
necessary to validate the figure without input from the platform itself. This might be
possible, but would not be straightforward. We would need, for example, to know the
change in the quantity of sellers (or sales) that would maximise profits for the platform if
it were charging a higher commission. We could then identify the change in consumer
demand that would trigger that size of increase in the quantity of sellers. Finally, we
would need to know how much lower the price to consumers would need to be to trigger
the increase in consumer demand that would set this chain in action.
Where these methods are effective and elasticities are successfully estimated, these
estimates can be plugged into the reformulated UPP and GUPPI expressions that Brekke
identifies. However, in a non-merger context in which the authority wants to understand
the level rather than the change in market power, they can also be plugged into an
adjusted Lerner index to provide a measure of a platform’s market power. Where these
estimates are not available, a potential short-cut set out by Tremblay (2017) is to compute
this adjusted Lerner index using administrative data on profits, fixed costs and revenues.
Where this administrative data is available, an adjusted Lerner index can be calculated as:
the total profit of the platform, plus the fixed costs of the platform, all divided by the total
revenue of the platform.
Other tools
Market shares, barriers to entry and exit, measures of concentration or profitability, and
patterns of use (e.g. single or multi-homing) are each also used to help assess market
power. However, the traditional problems of these types of tools that are not based on
consumer responsiveness, are exacerbated in a multi-sided context. Firstly, as Brekke
explains, some of these tools may assume no product differentiation, while platforms are
highly differentiated (e.g. strengths in different geographic areas, or amongst different
types of user), and the network effects themselves drive much of this differentiation.
Secondly, as Collyer, Mullan & Timan identify, a meaningful unit of measurement is not
always straightforward; for example, value, capacity, volume, or volume of full priced
sales might each make sense in different circumstances. In non-transaction multi-sided
platforms this can be further complicated if there is no common unit that can be used
across both sides, since this makes it unclear how to synthesize the two. Thirdly, these
tools provide no information on substitutability, and so give no sense of how
(in)vulnerable a given market share is. This is particularly problematic in multi-sided

markets since the cross-platform network effects also provide scope for the observed
market shares to quickly and radically change (tip).
As Collyer, Mullan & Timan suggest, market share tools are therefore of most value
when looked at over a period of time, since this indicates a degree of durability. They can
be of particular value when observed over a period of time during which there was a
change in the relative value of the products (e.g. a price increase). Effectively this
introduces consumer responsiveness into the tool. Of course, where such observations can
be identified in data, they can be turned into event studies, a more sophisticated tool that
can provide insight in a multi-sided context, provided the necessary adjustments are
made. For example, event studies of two-sided platforms need to consider what is
happening on the other side of the market, since the consequences of a reduction in the
value offered by the platform might be clear on one side but not the other.
Another tool that does not require information on responsiveness is to proceed directly to
measure the platform’s profitability and to compare that to a counterfactual of what a
competitive return would be. Collyer, Mullan & Timan point out that in a multi-sided
context this would need to recognise that costs incurred, and profits/losses on the other
side of the market, are part of the profitability of the platform, and need to be assessed
together. Many of the challenges faced in one-sided markets re-surface here. For
example, the difficulty in accurately measuring economic profit as opposed to accounting
profit, and the identification of the relevant counterfactual.
With regard to single-homing or multi-homing, both Collyer, Mullan & Timan and Rasek
& Wismer suggest that it can be useful for agencies to examine patterns of use and
establish whether users on one side of the market tend to single-home or multi-home on
different platforms. This can be important for understanding the nature of competition in
the market, for example, whether firms compete to sell each unit, or instead compete for
exclusive relationships with customers. However, as Rasek & Wismer note, it is not clear
whether the predominance of single or multi-homing suggests in and of itself that the
platform has market power. Widespread single-homing or exclusive use might, for
example, be taken to suggest that consumers do not see other platforms as good
substitutes (if we were to assume that consumers would sometimes use these other
platforms if they considered them a good alternative). However, it does not actually tell
us anything about consumers’ views on the potential substitutability of the platform; in
particular, it might be expensive to multi-home and there might be fierce competition
amongst platforms to be the exclusive platform used by each consumer, or at least by the
marginal consumers. 21
There is also an ambiguity to multi-homing (non-exclusive use of a platform). This might
be interpreted as evidence of users switching their demand between platforms (e.g. using
different supermarkets, search platforms, dating applications or advertising routes),
thereby implying strong substitutability and close competition. However, it might also be
interpreted as evidence that the platforms are complementary, thereby implying little
competition (e.g. using two search engines but using them to search for different things,
or using different advertising routes to reach different single-homing groups of users). 22
It is also possible to take a narrower definition of multi-homing as the use of multiple
platforms when making a single decision. For example, the use of a single platform when
looking to order a takeaway pizza on a Saturday evening might be defined as single-
homing, despite the fact that the consumer uses multiple platforms for food delivery over
the course of a month. Adopting this narrower definition makes multi-homing a closer
approximation of substitutability since it eliminates the possibility that the different

platforms were being used when making slightly different types of decision. However,
information on when multiple platforms are used within the same decision is often more
difficult to obtain. 23 Furthermore, even if multi-homing is common on one-side, it might
not indicate that the multi-sided market itself is highly competitive. For example, it is
often noted that surplus built up from multi-homing users (e.g. advertisers or callers to
mobile phones) can then be competed away on attracting single-homing users (e.g.
readers or mobile phone contract holders). However, if there are constraints that prevent
the platform offering negative prices to single-homing users, then the platform might be
able to limit the extent to which it competes away the surplus that it extracts on the other
side of the market. 24
Where tools are not based on consumer responsiveness, care is needed in interpreting
what an observed pattern of use says about substitutability on that side of the market, and
more generally what substitutability on one side of the market implies for the platform’s
market power, which needs to be judged across all sides of the market. 25 Nevertheless,
these tools might, as Collyer, Mullan & Timan suggest, be used to conduct a preliminary
analysis that considers the difficulties that arise as a result of the multi-sided nature of the
market (see above), and which is then adjusted in a second stage of the assessment to
reflect the impact of any cross-platform network effects. Where the cross-platform
network effects are one-way, the preliminary analysis can be sufficient to conclude on the
degree of market-power held by the platform in the provision of a product that generates
no cross-platform network effects for the other side of the market. However, where
products generate two-way cross-platform network effects, the preliminary view on the
market power of the platform will need to be revised. This revision requires an
assessment of whether the cross-platform network effects increase or decrease the degree
of market power identified in the preliminary assessment, and by how much. 26
Box 3. Summary of key considerations for market power
Where strong cross-platform network effects run in both directions, it is not possible for a
multi-sided platform to have market power on one side of the market. Either it has a
degree of market power as a platform, or it does not. Substitutability of demand might be
different on either side, but given the interrelationship of pricing across the platform, it is
not meaningful to conclude that a platform has market power on one-side of the platform.
For those tools that measure market power based on the responsiveness of demand, cross-
platform network effects need to be integrated within the analysis from the start.
• There are at least six effects that need to be estimated in order to apply the UPP
indices (or GUPPI) that have been adjusted for use in multi-sided markets. These
include the full impact that a price rise on side A will have: 1) the effect on demand
from users on side A; 2) the effect on demand from users on side B; and, 3) the
effect on the price on side B. They also include the same three impacts that a price
rise on side B would have. These six effects can be estimated by surveying users on
each side of the platform, though the questions will need testing with the relevant
audience.
• Where data and time permits, estimates of these effects can also be obtained from
demand estimations that can be used to simulate the effects of a merger or to
estimate an adjusted Lerner index.

• In cases where estimates of diversion ratios and elasticities are unavailable, it may
be that there is adequate administrative data to compute the adjusted Lerner index
using data on profits, fixed costs and revenues. Where this data is available, a
generalised Lerner index can be calculated as: the total profit of the platform, plus
the fixed costs of the platform, all divided by the total revenue of the platform.
• Since quantifying cross-platform network effects is a key task for the assessment of
both competitive effects and efficiency effects in multi-sided platform cases, it may
be worth collapsing these two stages into a single exercise in which both the agency
and the firm(s) seek to quantify the cross-platform network effects.
For other tools that measure market power without reference to the responsiveness of
demand, for example those that measure concentration or profitability, the impact of
cross-platform network effects might be reflected in a second stage of the assessment,
after a preliminary analysis has been conducted.
• The preliminary analysis might use standard tools to identify: the percentage of
users that use the platform; barriers to entry and exit; and profits. It might also look
at the patterns of single and multi-homing behaviour by users since these can be
helpful for understanding the nature of competition in the market. Taken together,
these analyses might allow a preliminary view on the market power of the platform.
• However, care is needed in interpreting what an observed pattern of use (e.g. single-
homing) says about substitutability on that side of the market, and more generally
what substitutability on one side of the market implies for the platform’s market
power, which needs to be judged across all sides of the market.
• Where cross-platform network effects are one-way, this preliminary analysis can be
sufficient to conclude on the degree of market-power held by the platform in the
provision of a product that generates no cross-platform network effects for the other
side of the market.
• Where products generate two-way cross-platform network effects, the preliminary
view on the market power of the platform then needs adjusting to reflect these cross-
platform network effects. This requires an assessment of whether these effects
increase or decrease the degree of market power identified in the preliminary
assessment, and by how much.
4. Exclusionary conduct
It might be argued that multi-sided markets require less scrutiny from antitrust authorities
and should be treated more leniently. This is because cross-platform network effects
magnify competitive constraints suggesting that these platforms have less market power
than first appears and because there are clear pro-competitive rationales for building
volume at the expense of rivals to take advantage of network effects.
However, both Katz and Valletti, Amelio & Karlinger emphatically disagree that greater
leniency is required. Katz concludes that the markets in which multi-sided platforms
operate may provide particularly fertile ground for exclusionary conduct, while Valletti,
Amelio & Karlinger suggest that exclusionary practices are more likely in these markets,
rather than less likely. 27 In each case, the conclusion is that examination of exclusionary

unilateral conduct in multi-sided markets should be a greater priority for agencies than it
is in traditional markets.
Why is exclusion a greater concern?

As standard amongst economists, both authors take the position that the effects of
potentially exclusionary conduct, such as exclusivity clauses or predatory prices, should
be assessed on a case-by-case basis. The question is whether the incentive or ability for
firms to use these practices in ways that generate anti-competitive effects is greater or
lesser in multi-sided markets than in traditional one-sided markets.
In the case of exclusivity contracts, the risk is greater because these contracts may affect
users on side B of the market who are not party to a contract agreed between the platform
and users on side A, and whose interests may differ. In contrast, in one-sided markets it is
sometimes suggested that exclusivity agreements are not likely to harm consumers
because it is not in the interests of competing retailers to make exclusivity agreements
with manufacturers if the effect is to increase the price that they have to pay. However, in
a multi-sided market it cannot be assumed that users on side B will consider the impact
on users on side A and refuse to participate in an exclusivity agreement with a platform
that excludes other platforms and harms users on side A (but not those on side B). 28
A second factor is that cross-platform network effects may create economies of scale
since platforms with more users on one side are more attractive to potential users on other
sides (everything else being equal). In the presence of economies of scale an incumbent
may use exclusivity contracts to shift the nature of competition from competing to sell
units to competing for an exclusive relationship with the consumer, and thereby raise
rivals’ costs. For example, instead of allowing users to multi-home and hence to
cautiously transition away from an incumbent by exploring and testing alternatives
without losing membership of the established network, 29 the incumbent can make this an
all-or-nothing choice between an emerging platform with few single-homing consumers
and an established one with many. This can mean user expectations on the platforms
future success play a key role.
In the case of predatory pricing, Valletti, Amelio & Karlinger suggest that the incentive
for the incumbent to exclude is larger, the stronger the cross-platform network
externality. Indeed, this holds even in markets in which a user on one side is indifferent to
the number of advertisers on the second side of the market. Katz also sees greater risks
from predation in multi-sided markets due to the opportunities for platforms to predate by
sacrificing profit on one-side while in parallel recouping by setting a high price on the
other side.
How do the tools need to change?

When assessing alleged exclusionary conduct in multi-sided markets it is inevitably a
challenge to distinguish between pro-competitive efforts to capture additional benefits of
network effects, and efforts to deny rivals access to these same effects. Though the
benefits are likely to be exhausted at a certain point, it is unclear at which point we might
suspect that such practices are less likely to reflect competition to obtain marginal
benefits, and more likely to reflect an effort to deny others the opportunity to generate
their own cross-platform network effects. 30 An understanding of the value of cross-
platform network effects at different output levels can therefore be helpful.

To assess the effects of exclusivity clauses involves following a framework of inquiry that
explores the impact of the clauses on rivals’ costs, and then on the intensity of
competition. 31 This broad framework remains applicable for cases involving multi-sided
platforms. In contrast, the more specific price-cost tests and recoupment tests often used
in predatory pricing cases no longer appear reliable. 32 A point that was made early in the
development of the multi-sided platform literature was that below cost pricing on one side
is more likely to be pro-competitive in a multi-sided market since it may help the
platform internalise cross platform network externalities. However, both Katz and
Valletti, Amelio & Karlinger here make the distinct point that not only can a platform
predate by reducing its total price to unsustainable levels, but that it can also do so by
changing the balance of prices across the different sides of the market. The implication is
that even adjusting price-cost tests to focus on net price is insufficient. 33 Instead, these
tests remain potentially misleading in multi-sided markets and should not be relied upon.
Katz also argues that the recoupment test needs to be interpreted with care. For example,
he urges agencies not to interpret this as a test of the rationality of below-cost pricing.
Instead, he argues that agencies should ask firstly whether below-cost pricing is profitable
because it makes the platform a stronger competitor by building up its base; and secondly
whether below-cost pricing is profitable because it weakens competition by preventing
rivals building their own user bases. This requires an understanding of whether the
below-cost pricing would have been profitable in a counterfactual world in which that
pricing did not weaken its rivals (for example by reducing its volume), allowing them to
continue to offer the same value product that they would have offered absent the below
cost pricing.
This ‘no economic sense’ test would identify clearly those exclusionary cases where
allegedly exclusionary conduct is harmful in multi-sided markets (while leaving a grey
area for those cases where there is an efficiency rationale but also an anti-competitive
effect). Unlike the as-efficient competitor test, this has the distinct advantage of
protecting consumers when a more efficient platform engages in conduct that excludes a
less efficient platform and reduces competition. As Katz says, there are cases where
competition between an incumbent and a less efficient rival is better for consumers than
facing a monopolist (even one with low costs), and this is true in both one-sided and
multi-sided markets. As such, requiring an investigating competition agency to show that
a firm’s conduct fails the as-efficient-competitor test is inconsistent with an effects-based
approach.
An additional proposal made by Katz is that the tools used to test for recoupment should
consider not only future recoupment opportunities, but the prospects of simultaneous
recoupment, for example on the other side of the market, or in an aftermarket.

Box 4. Summary of key considerations for exclusionary conduct
As in one-sided markets, the effects of potentially exclusionary conduct, such as

exclusivity clauses or predatory prices, should be assessed on a case-by-case basis.
However, multi-sided platforms may require more scrutiny from antitrust authorities than
one-sided markets, and should certainly not be treated more leniently since they may
provide particularly fertile ground for exclusionary behaviour.
Assessing the effects of exclusivity clauses requires a framework of inquiry that explores
the impact of the clauses on rivals’ costs, and then on the intensity of competition. This
broad framework remains applicable in multi-sided market setting.
Assessing the effects of predatory pricing typically involves the use of specific tools such
as price-cost tests. These tests should not be relied upon in multi-sided markets.
Recoupment tests should also be interpreted with care, since simultaneous recoupment is
possible in multi-sided markets.
Assessing predatory pricing therefore needs a framework that asks firstly whether the
allegedly predatory price would have been profitable in a counterfactual world in which
that pricing did not weaken its rivals. This counterfactual might be constructed by
estimating elasticities (or diversion ratios) and then removing any substitution effects
from the platform’s optimal price setting problem.
5. Efficiencies
As with competitive effects, there is a risk that efficiencies generated on another side of
the market will be missed if the multi-sided nature of the platform is not recognised.
Alternatively, such efficiencies might be identified but ruled to be out-of-market
efficiencies and hence not relevant for the legal assessment. However, as touched upon in
the market definition discussion, efficiencies or anticompetitive effects on other sides of
the market will be relevant whenever cross-platform network effects are significant.
Why are efficiencies more likely in multi-sided markets?

There is a broad consensus that there is scope for efficiencies in platform mergers. This is
because, as Padilla & Andreu explains, mergers between platforms might be expected to
combine separate user bases, and to increase interoperability. Indeed, Chandra and
Collard-Wexler (2009) have shown that under certain conditions a merged platform might
better internalise the various cross-platform network externalities and therefore set lower
prices to both sides of the market in order to increase participation on both sides and
expand the market. Secondly, as Padilla & Andreu emphasise, where these conditions do
not apply, and prices do increase, this may nevertheless reflect a better product that
captures more externalities and hence delivers better value, thereby increasing consumer
surplus even while the price increases. For example, a merger that better internalises
externalities and builds the user base may increase prices for advertisers, however if this
reflects a larger audience this might nevertheless increase the advertisers welfare.
Given the broad agreement that there is scope for efficiencies in multi-sided markets
where cross-platform network effects are significant and the separate platforms are

incompatible, it is perhaps surprising that there are no cases in which efficiencies have
been accepted. One answer might be that while efficiencies are more likely to be
generated in multi-sided markets, there often may remain less anti-competitive ways of
achieving the same efficiencies, for example by allowing interoperability or adopting
shared standards. In any case, as Johnson suggests, it would appear that agencies should
give particularly careful consideration to the scope for efficiency defences in multi-sided
markets.

There is broad agreement that that the standard econometric tools for assessing
efficiencies do not need to change and the existing tools can continue to be used in multi-
sided markets. As an example of how these standard tools can be applied to a multi-sided
market Padilla & Andreu provide a post-mortem analysis of previous mergers in the stock
exchange market. This demonstrates the type of efficiency analysis that might be
expected. The analysis takes data on previous mergers of stock exchanges and tests for
evidence of efficiencies in the post-integration period. For example, it confronts questions
over the relevant counterfactual using a placebo test, it considers alternative integration
milestones and different measures of liquidity, and the possibility of an omitted trend.
There remain questions over how to extrapolate the results of past mergers onto new
mergers that involve firms of different sizes and of different natures, particularly where
we might expect the gains to diminish as scale increases. However, where analysis of this
depth can be performed within the timeframes of an investigation it would appear to
provide useful insight on the likely effects of the merger.
In addition, a range of other tools also exists, for example demand modelling techniques
and user surveys. These take data on either the revealed or stated choices of users on each
side of the market and seek to estimate demand in order to identify the benefits to users
from accessing a larger platform. Notably when using these tools the key variable to
estimate is the cross-platform network effect, which as we have noted was also the focus
of the market power assessment. This (again) begs the question of whether these market
power and efficiency assessments might not be run as a single effects assessment in cases
where the market is indisputably multi-sided.
However even a combined assessment would encounter the challenge of operationalising
these tools in practice. As Shelanski, Knox & Dhilla note, while economists do have tools
available for assessing the effects of conduct or mergers of platforms, all of those tools
take resources, personnel, and in many cases data which can be hard to come by. He
therefore suggests that a useful operational step is to prioritise analytical efforts based on
the nature of relationships in multi-sided markets. The two types of relationship he
identifies, service-based, and subsidy-based, are comparable to the concepts of matching
and audience providing platforms that Rasek & Wismer put forward. As described earlier,
Rasek & Wismer use the term matching platform to refer to a platform in which the
cross-platform network externality is positive on both sides and the objective of the
platform and all users is to find the best possible match. While platforms in which the
externality runs in just one direction are considered to be an audience-providing platform.
The suggestion by Shelanski, Knox & Dhilla is that where conduct is targeted at a
supplier or an end-user in a matching (or service-based) platform, there is likely to be a
magnification of harm or of efficiencies as a result of the cross-platform network effects.
In such cases, efficiencies may arise on all sides of the market and so agencies need to
consider all sides. In contrast, in an audience providing (or subsidy-based) relationship

any efficiencies that accrue to advertisers are unlikely to benefit users. This means any
harm to users is unlikely to be counterbalanced by efficiencies to advertisers. Agencies
may therefore focus on evaluating the existence of efficiencies for advertisers in such
cases – for example on efficiencies to users when users are harmed, and on efficiencies
for advertisers when advertisers are harmed.
Box 5. Summary of key considerations for efficiencies
Where cross-platform network effects are strong, mergers of multi-sided platforms might
be expected to generate efficiencies if they combine separate user bases and increase
interoperability. There would therefore appear to be significant scope for efficiencies to
arise in platform mergers.
Agencies should give careful consideration to the scope for efficiency defences in multi-
sided markets. Focusing analysis on the magnitude and merger specificity of such effects,
rather than their existence may therefore provide better analytical value for agencies.
Standard econometric tools such as event studies can sometimes be used to assess the
efficiencies that have previously been generated by greater scale. These do not require
estimates of the cross-platform network effects.
To use simulation tools to understand the likely efficiencies of a merger for users on each
side of the market, agencies will need an estimate of the cross-platform network effects.
Surveys or demand estimations can be used to generate these estimates, as they were in
the competitive effects assessment.
Operationally there may be advantages to running the competitive effects and efficiencies
assessments as a single effects assessment in those cases where the multi-sided nature of
the market is undisputed.
It may also be a useful operational step to prioritise analytical efforts based on the nature
of relationships in multi-sided markets. For example, in an audience providing (or
subsidy-based) platform, agencies might focus on efficiencies to users when they expect
users to be harmed, and on efficiencies for advertisers when they expect advertisers are
harmed. In contrast, in a matching (or service-based) platform, agencies will need to
consider all sides of the market.
6. Vertical restraints
Vertical restraints in multi-sided markets can be imposed either by platforms on users

(e.g. across platform parity agreements), or alternatively by users on platforms (e.g.
selective distribution systems that threaten to delist platforms that do not comply). In
multi-sided markets they can include: internet minimum advertised prices; resale price
maintenance; across platform parity agreements, most favoured nation clauses; online
sales bans, exclusive distribution systems; selective distribution systems; and exclusive
supply agreements. These can all generate pro-competitive efficiencies, however
concerns can also arise that they may exclude rivals (as discussed in section 4 above in
relation to exclusivity clauses), soften competition, or facilitate collusion. Notably
restraints agreed between platforms and users may not always be only vertical in nature if
the user is also operating a traditional business model that sells directly to consumers and

hence competes with the platform. This may create some challenges as to whether a case
involves price fixing amongst rivals or a vertical restraint.
Are vertical agreements a greater concern in multi-sided markets?

The assumption that downstream firms will not sign agreements with upstream firm that
lead to them paying higher prices is sometimes used to dismiss concerns with
exclusionary vertical restraints (this is known as the efficiency of bilateral bargaining that
Chicago school thinkers have referred to). A key point made by Katz is that this may not
apply in multi-sided markets. While it has long been understood that there are
circumstances in which anticompetitive outcomes can result despite bilaterally efficient
bargaining in traditional markets, 34 these circumstances might be expected to be
significantly larger in multi-sided markets. This is because the bilateral bargaining does
not include one or more sides of the market that might be harmed by restraints that are
agreed and which mutually benefit the negotiating parties. This is true in both traditional
and multi-sided platform markets. The difference is that sellers and the platform will have
their incentives aligned if the platform earns a fixed commission on sales made by sellers,
and so, unlike in a traditional wholesale market, the intermediary would not protect
consumers by refusing to sign up to bilateral agreements that would increase the
wholesale price that they pay.
For example, across platform parity agreements between a platform and a group of sellers
that pay the platform commission on their sales might ensure that no rival platform can be
offered a better price, thereby removing the ability for sellers to undercut the platform if it
increases the commission that it charges. However if the increase in commission paid by
sellers can be passed onto consumers who are not party to the vertical restraint then the
agreement may still benefit the sellers.
As a result, there may be less scope for consumers to be protected by the efficiency of
bilateral bargaining when a platform acts an agent for sellers on one-side of the market.
This might suggest that vertical restraints in multi-sided markets may require a little more
scrutiny from agencies than similar agreements in one-sided markets, and as in the case of
exclusionary conduct, should not be treated more leniently. 35
Both Johnson and Caffarra & Kühn make a plea for competition agencies to make a real
effort to understand the potential efficiency rationales for such restraints. Caffarra &
Kühn suggest for example that in many cases what firms are really trying to deal with is
contractual incompleteness (rather than looking for ways to increase price). Johnson gives
the risk of free-riding as an example. He follows Rochet & Tirole in identifying, as an
example, the investments that credit card companies make in building customer loyalty
through reward systems or good customer service. He notes that some of these
investments might be put at risk if a merchant is able to steer consumers that are attracted
by the merchant’s membership of the platform to then bypass the platform and transact on
a cheaper platform.
Of course, these complaints are also common in one-sided markets. However, a case can
be made that efficiency rationales for vertical restraints are particularly strong in multi-
sided platforms. After all, if platforms can be easily bypassed after matching buyers and
sellers, then they are unlikely to be viable. For example if Airbnb does not restrict
property owners from providing contact information to tenants then it will not have any
transactions taking place on the platform, it will earn no commission and the platform
would not be viable. More problematic however is the nature of the investments that
platforms can make viable through such restraints. For example, heavy investment in

advertising may indeed no longer be viable if sellers are able to offer cheaper prices on
their own website than on a platform website. However it is unclear what value
consumers place on these investments (provided the platform itself remains viable), and
hence how much these investments would be missed if the business case for them no
longer made sense. This is particularly problematic if the restraints are at the same time
likely to soften competitive incentives and lead to higher prices.
Johnson also identifies an interesting efficiency defence that might arise particularly in
multi-sided platforms. He cites a paper by Lee (2013) which identifies the importance of
exclusivity clauses for smaller videogame platforms that were seeking to enter into the
videogame market. These platforms were able to use the restraints to counteract the
strong cross-platform network effects that incumbents enjoyed which might otherwise
have prevented them from entering and competing on the market. 36 While such entrants
would not hold market power at the time they agreed these clauses, they may later grow
into stronger positions. Therefore, the case-specific context in which the agreements
apply will matter and a form-based approach will be an unreliable indicator of the effect
of the restraint on consumers.

Assessing the effects of vertical restraints requires a framework of inquiry that:
• identifies the nature and scope of the restraint (and whether in practice it is
binding);
• explores the effect of the restraint on the incentives of the firms involved (and
those that are not); 37
• considers the potential responses to any change in behaviour that do occur (e.g.
defensive actions by buyers);
• tests whether these effects have been observed;
• looks at the rationale for participation by each side; and
• identifies the likely counterfactual.
Since this framework is a broad one, and each analysis should be tailored to facts of the
case, it remains applicable in a multi-sided market setting. Therefore, in principle the
tools that are used do not need to change. However, in practice the use of these tools to
analyse the effects of a restraint is rarely conducted. Therefore, one proposal from
Caffarra & Kühn was to help simplify the analysis in cases when the product on one side
of the market is free, by interpreting a multi-sided market within a standard vertical
framework in order to help agencies think through the standard foreclosure concerns
when vertically integrated and vertically disintegrated supply chains compete with each
other. For example, under this proposal the number of users on one side might be thought
of as an input that is used to produce a downstream product that is sold to the users on
other side of the market. The platform then decides how much to invest in increasing the
quality of this input by expanding its user base on that side of the market.
By design this approach takes no account of the strong cross-platform network effects and
so contrasts with the view that when analysing multi-sided markets competition agencies
should recognise these effects and the difference that they can make to the analysis. For
example, if users prefer a variety of sellers then treating the user base simply as an input,
and ignoring the impact that feedback loops have on demand can lead to mistakes.
In the case of Across-Platform-Parity-Agreements (APPAs) for instance, it is sometimes
argued, often by platforms, that sellers can choose to delist from platforms that impose

such restraints, and that this preserves a competitive constraint on the commission that is
charged by the platform. If this argument is valid, it suggests that APPAs are mutually
beneficial and hence more likely to exist for efficiency reasons. If however, the number
of users is treated as an input into the product, then the analysis would miss the fact that
users are likely to switch away from platforms if sellers choose to delist. The potential
competitive threat posed by the option to delist would then be missed, and the
competitive constraint on the platform’s commission underestimated. As a result, the
conclusions reached on the effect of the vertical restraint might be different (it might be
judged harmful when it is not). This suggests that while it is certainly true that parallels
can helpfully be drawn between analysis in one-sided and multi-sided markets in order to
explain certain theories of harm, the analysis itself requires a recognition and
understanding of the difference that cross-platform network effects make.
Box 6. Summary of key considerations for vertical restraints
As in one-sided markets, the effects of vertical restraints need to be assessed on a case-

by-case basis. However, agreements in multi-sided markets may require more scrutiny
from agencies than similar agreements in one-sided markets, and should certainly not be
treated more leniently.
The broad framework of inquiry for assessing the effects of vertical restraints remains
applicable in a multi-sided market setting.
Where cross-platform network effects are strong, use of vertical restraints by multi-sided
platforms might in some cases be necessary to prevent free-riding and hence the bypass
of the platform.
Where free-riding poses a threat to the viability of the platform there would appear to be
significant scope for vertical restraints to generate efficiencies (though this may not be the
case for other investments that might be viable as a result of the restraint).
Competition agencies should therefore give careful consideration to the scope for
efficiency defences in multi-sided markets.
Notes
1 Armstrong (2002), Evans (2003), Wright (2004).

2 See for example Evans & Schmalensee (2012).
3 This is based upon Evans (2003) definition that Filistrucchi refers to.
4 This is sometimes referred to as an indirect network externality.
5 Rochet & Tirole (2006). Hermalin & Katz (2017) note that this focus on price should also be
extended to terms and conditions since prices in these markets are often set at zero. Filistrucchi
explains that price structure only affects volumes in transaction platforms if there is some
limitation on the ability of one side to pass-through a price differential set by the platform to those
on the other side of the market. Where there is no such limitation, the platform cannot control the
structure of prices across the two-sides and hence their price structure cannot affect volumes.

6 The economic distinction between these categories that we have highlighted above may of course
be relevant in a different context.
7 An exception which simplifies some cases is where users on other sides of the platform are
indifferent to the use (or membership of) of the platform by another side. For example advertising
markets might be analysed as one-sided if readers, viewers or listeners are indifferent to the
quantity and nature of advertising on their product. There also remains of course the question of
the scope of that one-sided advertising market: does it include television, radio, newspapers, social
media and so on? Is it for ages 25-35 or 75+? And over which geographic area? However, these
are traditional market definition questions, which can be answered using traditional tools.
8 See for example, Kaplow (2010 and 2013). Rasek & Wismer and others suggest that it remains
useful.
9 Another example is the Vertical Block Exemption Regulation in the EU, where satisfaction of the
30 per cent market share threshold may hinge on whether one single or two interrelated markets
are defined.
10 In a SSNIP test, the profitability of a small but significant non-transitory increase in price is
examined for each candidate market. If a SSNIP would not be profitable then the scope of the
candidate market is expanded, and the test is re-run on this next iteration of the candidate market.
When a SSNIP is profitable the candidate market is identified as the relevant market.
11 A firm can reduce value and capture surplus by either increasing price, or reducing its costs by
investing less in quality.
12 As Rasek & Wismer point out there is likely to be significant heterogeneity in the cross-platform
network externality for different users and consumers. However, unless the platform can price
discriminate it will need to optimise based on the overall elasticity. If price discrimination is
possible, this might indicate the existence of distinct markets (based on the ability to price
discriminate).
13 Equally, an increase in the price of advertising would reduce demand for advertising in the
newspaper, which may lead to fewer adverts. This, in turn, may increase readership, which would
increase demand for advertising. This feedback effect means that the price increase for advertising
is more profitable than would appear if the impact on readers (and how that in turn affects
advertising demand) were ignored.
14 Note this is different from the cellophane fallacy, which is a problem in one-sided markets that
remains in multi-sided markets. This is the possibility that the market price from which the test
begins is in fact already a monopoly price and hence any increase will not be profitable and so
further increases to the price will not identify a profitable SSNIP since each iteration brings the
price further away from its optimal level.
15 Strictly, however it is worth observing that the barrier to entry is not the cross-platform network
effect itself, but rather the inability of users to co-ordinate their response to that effect. This means
for example, that where users have effective co-ordination mechanisms available to them, this
may remove the barrier to entry, even if the cross-platform network effect remains. This makes
collective switching schemes a potential model for improving the way that these markets work for
users.
16 However, the substitutability of demand might still be different on different sides of the market.
17 This remains the case whether a multi-sided market has been defined, or whether two interrelated
markets have been defined. Though of course, strictly, we do not know if these cross-platform
network effects are strong or not until they have been estimated.
18 See paragraphs 23 to 26 of Brekke, and previously in Affeldt et al. (2013) and Cosnita-Langlais et
al. (2018)

19 Brekke refers to this as a “feedback effect” but we refer to it here as a “rebalancing effect” in
order to distinguish it from the simple feedback loops identified in para 9. It reflects the fact that
the increase in price has a rebalancing effect on the prices set across the different sides of the
market (not only a direct effect on demand on each side).
20 Whilst most practical in longer investigations of unilateral conduct or in the context of market
studies, these estimations are now being used in mergers within sectors that provide both data and
a continuous stream of merger inquiries. For example, both the Netherlands and the UK have
constructed demand models for hospital services, which can be applied in the context of
individual mergers.
21 For example, rival mobile phone networks might compete to be contracted by handset owners, and
would then match those handset owners with those that want to call them (from fixed or mobiles
lines). The networks would then set their price for calling the consumer knowing that the caller
had few good alternative options. However, it would be inaccurate to describe this as market
power without reference to the intensity of competition to contract with the handset owner.
Therefore, the habit of single-homing (having one mobile phone rather than two) might not tell us
much about the market power of the mobile phone network. As discussed in OECD (2017) a
competitive market might be followed by an uncompetitive aftermarket if consumers do not
anticipate future costs (e.g. printer cartridges) or do not incur them (e.g. mobile phone termination
charges under a calling party pays system).
22 For example, users might use a second platform in addition to their usual platform. For example
house renting/sales platforms and general search; or different estate agent platforms for searching
in different geographic areas (or at different price levels). Alternatively, sellers might use a second
platform to reach buyers that single home on that platform (this is the competitive bottleneck).
23 This narrower definition of multi-homing as the use of multiple platforms in the course of a single
purchasing decision is for example used in the CMA’s analysis of the Just Eat / HungryHouse
merger.
24 For example, investments might be required to facilitate paying negative prices and contracting
for exclusive use of a platform.
25 For example, if multi-homing on one-side is interpreted as reflecting complementarity and not
substitutability and hence indicates a lack of market power on that particular side, this might
indicate smaller competitive incentives to compete for consumers to ‘sell’ to the other side.
26 For example, a one-sided assessment might suggest that platform X has a large share of
sellers/advertisers but a small share of buyers. The cross-platform network effects might then
reveal that buyers are relatively insensitive to the range of sellers, while sellers care a lot about the
number of buyers on the platform. This might suggest that another platform with a small share of
suppliers or more consumers might be a stronger constraint than first thought. Alternatively, a
one-sided assessment might suggest that platform Z is in a relatively vulnerable position (e.g. low
barriers to entry, low switching costs, and a small share of users). However, the cross-platform
network effects might reveal that users are very sensitive to the participation of certain sellers (e.g.
important brands), and the platform has a strong position in relation to those sellers (e.g. a high
share or exclusive contracts). This might suggest that the platform has more market power than
first thought.
27 He also notes recent work suggesting that in markets with zero-price (which is not uncommon in
platform markets), anti-competitive tying strategies can be substitutes for predatory strategies.
28 If the cross platform network effect is strong enough, then harm to side A would also harm side B
by reducing participation on side A. However, this may not be the case if these effects are weaker
and in any case users on side B might not foresee the third order effects of their actions.
29 Shapiro (1999).

30 For example, going from 91 to 93 percent of web searches might be unlikely to improve a
platform’s algorithms in the same way that going from one to 3 percent might do.
31 See OECD Fidelity Rebates (2016) for details of this framework.
32 See Wright (2004).
33 See Behringer and Filistrucchi (2015).
34 See Valletti, Amelio & Karlinger citing Segal and Winston (2000) on divide and conquer
strategies, Katz citing Calzolari and Denicolò (2015), and Farrell (2016) on vertical collusion.
35 Johnson is agnostic on the issue of whether restraints are more or less likely to be anticompetitive
in multi-sided markets.
36 Lee (2013).
37 Including for example any contracting externality.

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PART II. MARKET DEFINITION │ 35
Part II. Market definition

1. MARKET DEFINITION IN MULTI-SIDED MARKETS │ 37
1. Market definition in multi-sided markets
By Lapo Filistrucchi *
Abstract
Drawing from the economics of two-sided markets, I provide methodological suggestions

for the definition of the relevant market in cases involving multi-sided platforms. In
particular, I provide suggestions regarding a) how to identify the two-sided nature of a
market; b) when multi-sidedness should be taken into account; c) how many markets
should be defined; d) how the SSNIP or HM test should be performed; e) how the
relevant market should be defined when one-side of the market is free. I also discuss
when and to what extent one-sided methods may be harmless, or even useful.
1. A working definition of a two-sided market
Many authors have proposed different definitions of a two-sided market. While the debate
may not be fully settled, for all practical purposes a good working definition1 is that a two-
sided market is a market in which a firm acts as a platform and sells two different products
or services to two groups of consumers, while recognising that the demand from one group
of customers depends on the demand from the other group and, possibly, vice versa. 2
Importantly, the demands on the two sides of the market are linked by indirect network
effects 3 and the firm recognises the existence of (i.e. internalises) these indirect network
effects.
The buyers of the two products, however, do not internalise these effects, which are
therefore often called externalities.
Although firms’ strategies in two-sided markets may be, under some conditions4, similar to
those in one-sided markets with complementary products, the fact that buyers do not
internalise these externalities makes a two-sided platform different from the case of
complementary products5. In the case of complements, both products are bought by the same
* Lapo Filistrucchi, Department of Economics and Management, University of Florence, Italy and
CentER and TILEC, Tilburg University, The Netherlands. Corresponding Address: Lapo
Filistrucchi, Dipartimento di Scienze per l’Economia e l’Impresa (DISEI), Università di Firenze,
Via delle Pandette 9, I - 50127 Firenze, Italy, e-mail: lapo.filistrucchi@unifi.it. This contribution
draws from previous work with my co-authors Pauline Affeldt, Eric van Damme, Damien Geradin
and Tobias Klein. I am indebted to them and, more generally, to TILEC members for help in
developing and clarifying the ideas I here put forward.

38 │ 1. MARKET DEFINITION IN MULTI-SIDED MARKETS
buyer, who, in her buying decision, can therefore be expected to take into account both
prices. Customers of a two-sided platform do not typically take into account both prices. 6
Typical examples of two-sided platforms include (i) media companies, that sell content
and advertising space, (ii) payment cards companies, that sell the use of a card to buyers
and that of a point-of-sale (POS) terminal to shops, or (iii) online intermediaries, that sell
their services to buyers and sellers.
In media markets, advertisers’ demand for ads on a media outlet increases with the
number of consumers of content (viewers, readers, listeners, etc.), while the latter might
also be, positively or negatively, affected by the quantity of advertising. Similarly in
payment cards markets, the more cardholders there are, the higher the demand from shops
and vice versa. Card issuers such as American Express or VISA are well aware of this
relationship between the two demands they face. Also online intermediaries such as eBay
know that the more buyers visiting their website, the more likely it is that sellers will use
their services and vice versa. In fact, the most common business model on the Internet, as
shown by the success of Google or Facebook, is to attract users with various free services
and sell their attention to advertisers.
2. A useful distinction among two-sided markets
Different classifications of two-sided markets have been proposed. Although most of

them have some type of rationale, crucial for the analysis of market definition in two-
sided markets is the distinction between two-sided transaction and non-transaction
markets. 7 This distinction is important because it highlights a fundamental difference in
the pricing strategies available to platforms in the two types of markets.
Two-sided non-transaction markets are characterised by the absence of a transaction
between the two sides of the market and, even though an interaction is present, it is
usually not observable by the platform, so that the platform is unable to set a per-
transaction or per-interaction fee or a two-part tariff. 8 Examples of two-sided non-
transaction markets are traditional media markets. Newspaper publishers, for instance, set
access prices on both sides.
Two-sided transaction markets are instead characterised by the presence and observability of
a transaction between the two groups of platform users. Then the platform is not only able to
charge a price for joining the platform but also one for using it, i.e. it can charge a two-part
tariff. 9 An example of two-sided transaction market is the market for payment cards10.
While two-sided non-transaction markets are characterised by membership externalities
(or indirect network effects), two-sided transaction markets are characterised also by
usage externalities.
Membership externalities arise from joining the platform (buying a newspaper or placing
an ad in a newspaper, holding a payment card or having a point-of-sale terminal, listing
your product at an auction or attending an auction), whilst usage externalities arise from
using the platform (paying or accepting payment with a card, selling and buying a product
at an auction).
The value of joining the platform depends on the number (or more generally the demand)
of customers of the other side. The benefit of using the platform similarly depends on the
demand for usage by the other side.

For instance, assuming that a customer holds a card and a shop has the corresponding
point-of-sale terminal, even if this customer wants to pay by card, the merchant has to be
willing to accept that card for that particular transaction and vice versa. Once again these
externalities are not internalised by the users of the platform, i.e. the cardholder and the
merchant. For instance, suppose a given merchant would benefit from being paid by card
because she would not need to go to deposit cash and she would not have to face the risk
of being robbed. A cardholder would not take that into account when offering to buy in
cash or by card. He would only consider his own convenience.
In a two-sided market, where two products or services are sold to two groups of
customers, one can define the two distinct concepts of price level and price structure 11.
The price level is (roughly) the sum of the two prices, while the price structure is
(roughly) the ratio of the two prices.
For a market characterised by a transaction between end-users to be two-sided, it is also
necessary that, not only the price level, but also the price structure affects the volume of
transactions. 12 For that to be the case, it needs to be impossible for the side that pays more
to the platform to pass through the difference in price to the other side. If a complete
pass-through were possible, the price structure chosen by the platform would not matter.
The platform would not control the relative price charged to the two sides.
Clearly, a complete pass-through can only take place if there is a transaction between
customers on both sides of the market. Only in those markets there may be market
conditions such that the market is in fact not two-sided 13.
In markets where there is no transaction between end-users of the platform, no pass-
through between the two sides can take place. Thus, the platform has perfect control of
the relative prices charged to the two sides. 14
3. Assessing the two-sided nature of the market
Before being concerned with how to perform market definition when the market is two-
sided, we should assess whether the market is in fact two-sided and, if so, whether two-
sidedness is likely to matter.
In order to assess the two-sided nature of the market, it is crucial to identify and characterise
the indirect network effects that link the demands on the two sides of the market.
One might therefore ask whether such indirect network effects exist, whether they are one
or two, whether they are both positive, or one is positive and one negative and, finally,
how significant they are.
For instance, when analysing a merger in the newspapers market, one might want to
know whether a larger readership of a newspaper ceteris paribus (i.e. holding constant
also prices) implies a higher demand to advertise on that newspapers, whether readers
dislike advertising and, if so, whether advertisers like readers more than readers dislike
advertising. Similarly for a merger among TV channels.
If a market is a non-transaction market, looking at externalities is sufficient.
If instead the market is a transaction market, then one should also check if there are
transaction costs or, more generally, limits to the bilateral setting of prices among buyers and
sellers or if there are platform constraints on pricing between customers on the two sides.

In payment cards markets, for instance, this could be the case not only of the no-
surcharge rule but also of menu costs for a shop that wishes to set a different price for its
products depending on whether the buyer pays by cash, by VISA debit, VISA credit or
AMEX. But it could also be the case of a shop that faces a lot of competition from shops
nearby and therefore has a high probability of losing a customer when attempting to
surcharge.
Only if these constraints exist then the market is two-sided, because the side charged the
higher price by the platform would be unable to pass through completely the difference in
prices to the other side.
Indeed, the lower the pass-through among the parties that transact, the more important the
two-sided nature of the market.
In practice, in order to assess the two-sided nature of the market, both qualitative and
quantitative approaches are possible.
As a first step one could use a qualitative approach and focus on checking whether there
are indirect network effects and, if so, what their sign is, i.e. whether these effects are
both positive or one is negative.
For instance, one might want to know not only whether advertisers base their decisions on
which newspaper to place their ads on the number of readers and whether indeed they
attach positive value to a higher readership, but also whether readers like, dislike or are
indifferent to advertising.
If they are not present, one could then proceed considering the market(s) one-sided.
If instead indirect network effects are present, one needs to distinguish :
• If the market is a non-transaction one, since the pass-through between end-users is
by definition zero, the market is two-sided.
• If the market is a transaction one, one should check to what extent transaction
costs, or constraints set by the platform, limit the possibility of pass-through
between the two sides. If there is scope to believe that the pass-through is high,
then one could come to the conclusion, that although the market is two-sided, the
two-sided nature of the market might not play a great role in practice.
The simplest way to assess qualitatively the two-sided nature of a market could in some
cases be a logical argument.
For instance, in the case of newspapers or TV, it would appear evident even at first sight
that advertisers value positively the number of readers of a newspaper or the number of
viewers of a TV channel. Indeed, the only reason advertisers advertise in a newspaper or
on TV is that they aim to reach readers or viewers with their message.
Unfortunately this approach cannot always be followed, as in some cases it is not clear
whether one side cares about the other and a fortiori whether it values the other side
positively or negatively.
For instance, despite some evidence for specific countries, it is not clear what the attitude
of readers is towards advertising in different media.
In fact, one of the drawbacks of this deductive approach is that it may lead to different
conclusions on the existence and, more importantly, the sign of the network effects.

A slightly superior way to assess qualitatively the two-sided nature of a market could be
interviewing agents in the market (i.e. business people but also their customers) or
making them fill-in a questionnaire with the aim of assessing whether they value,
positively or negatively, the presence of more customers on the other side, and in case of
a transaction market, whether there are factors limiting the platform’s ability to control
the price ratio.
For instance, in the case of newspapers, one could ask newspaper readers whether they
like advertising on the newspaper, whether they are annoyed by it or whether they are
indifferent to it.
In some cases such surveys might indeed already exist.
This is the case, for instance, in many countries where communication or social scholars
run surveys with regard to the use and the perception of media.
The main drawback of this interview approach, and of any qualitative approach, is that it
does not allow one to measure the size of the indirect network effects. Yet the latter is
crucial to establish to what extent indirect network effects play a role in market
definition 15.
Hence, as a second step, one might need to assess the two-sided nature of the market by
using a quantitative approach and turn to checking not only whether there are indirect
network effects and whether they are positive or negative but also on measuring their
size.
For instance, in a case involving newspapers, one might want to know how much
advertisers value an additional reader or, in a case involving payment cards, one might
want to check whether merchants care more about one additional cardholder than a
cardholder cares about one additional merchant having a point-of-sale terminal.
In order to answer these questions one can follow two different quantitative approaches:
the stated preference approach (i.e. designing a survey) and the revealed preference
approach (i.e. collecting actual data). Both are often more time consuming than a
qualitative approach as they require the collection and analysis of data. They would thus
seem more applicable in a second phase of an analysis.
In fact, having already identified two-sidedness using a qualitative approach might help in
figuring out which are the relevant questions to formulate and the relevant data to collect.
4. Defining one or two markets
The main purpose of market definition is to identify the products that exert competitive
pressure on the products sold by a particular firm or firms, be they firms that plan to
merge, a firm suspected of anti-competitive behaviour or firms that might become the
target of a regulatory intervention. Market definition is therefore an attempt to define a
group of products, which are substitutable to such an extent that the firms producing them
can be perceived as competing against each other, thus constraining each other’s ability to
increase prices.
In a two-sided market, a firm sells two distinct products on the two-sides of the market
and the demands for these products are linked by the presence of indirect network effects.
Firms in a two-sided market can be seen as platforms that need “to get both sides on
board” 16 in order to do business.

The question then arises whether there are two (interrelated) markets to be defined or
only one market encompassing the two sides.
For instance, when analysing a merger among TV broadcasters the question is whether
there is a market for TV or there is a market for advertising (on TV) and a market for TV
content. Similarly, in a case involving payment cards, the question is whether there is a
market for payment cards services or a market for payment cards services to cardholders
and a market for payment cards services to merchants.
It turns out that, whether one needs to define one or two markets, depends crucially on the
type of two-sided markets. More precisely,
• In two-sided non-transaction markets, one should define two (interrelated)
markets.
• In two-sided transaction markets, one should define only one market.
In fact, in a two-sided transaction market the product offered is the possibility to transact
through the platform. It takes the form of two distinct products, one for each side of the
transaction, because such possibility needs to be offered to both sides. Yet none of these
two products is sufficient without the other. A customer on one side can consume his
product only if the corresponding customer on the other side consumes his product too. In
other words, the two products need to be consumed in a fixed 1:1 proportion, as perfect
complements, but by two different consumers.
For example, in the purchase of a pair of shoes through a shop, the merchant cannot
receive money through the POS terminal unless the client has a payment card and is
willing to use it; and vice versa.
Importantly, a two-sided transaction market candidate substitute products constraining the
ability of the two-sided transaction platform to raise prices are not only other platforms,
which offer, to both sides, the possibility to transact but also non-intermediated
transactions.
One of the consequences of defining only one market is that a firm would be either on
both sides of the market or on none. Defining instead two interrelated markets would
allow a platform to be on one side of the market but not on the other. Whether one or the
other outcome is right depends on the type of two-sided market under consideration.
A payment card company such as Diners Club is either in the relevant market on both
sides or on none, for the simple reason that either the transaction between the buyer and
the merchant takes place using Diners Club services on both sides, or it does not take
place through Diners Club. The analysis of a merger between two payment-card
platforms should thus consider, for instance, whether cash transactions or PayPal exert
competitive pressure on these payment card companies.
However, in a case involving TV broadcasters, a product might be in the relevant market
on the advertising side but not on the viewers’ side. 17 For instance, suppose that people
do not regard TV and newspapers as substitutes because they read the latter on the metro
going to work and watch TV at home in the evening. Assuming that advertisers are
interested in reaching each person only once during a day, they will tend to regard TV and
newspapers as substitutes. TV would then be in the same relevant market as newspapers on
the advertising side but not on the viewers’ side. The analysis of a case involving TV
broadcasters should then be allowed to conclude that newspapers exert competitive pressure
on TV in the market for advertising but not in the market for content.

Clearly, in two-sided transaction markets end-users on the two sides can be charged both
a fixed fee for joining the platform and/or a per-transaction fee for using the platform.
Conceptually this feature is not present also in single-sided markets where customers are
charged two-part tariffs, as for instance the traditional market for fixed mobile phone
services. Consistently with previous practice in these one-sided markets, one should
define a single market, in which both membership and usage are sold.
The peculiarity of two-sided transaction markets is not the presence of two-part tariffs.
The differences with respect to a single-sided market are the presence of indirect network
effects between the membership markets on the two sides and the fact that the usage
market is a transaction market linking the two-sides. These differences imply that a single
market encompassing membership and usage cannot but comprise both sides of the
market.
In a two-sided non-transaction market instead there is no transaction and, as a result, there
is not such a strong link in the usage market. In these markets the link among the
membership markets is present, because of the indirect network effects, and needs to be
taken into account when defining the relevant market, but it is not so strong that it implies
the necessity of a single market for the purpose of market definition.
5. Considering both sides of the market
Given the necessity to define a single relevant market ecompassing both sides, it is
obvious that one should consider both sides of the market when defining the relevant in
the case of two-sided transaction markets.
For instance, one should look at both buyers and merchants when one defines the market
for (transactions by) payment cards. It may be that ex post, i.e. after the analysis, one
concludes that one side plays a decisive role in the decision. However, a priori it is clear that
both sides need to agree for the transaction to take place through the payment card company.
Also in the case of two-sided non-transaction markets, competition and regulatory
authorities should take into account both sides of the market when defining the relevant
market 18. Indeed, they should consider the role of the indirect network effects and define
two interrelated markets.
For instance, in a merger among newspapers, one should look also at the advertising side
when defining the relevant market for readers and vice versa.
A platform in a two-sided market needs both sides “on board” and therefore competes for
customers on both sides. How much competition a platform faces in getting customers on
one side also depends on its competitive position on the other and vice versa.
It is well known in the economic literature that product differentiation, whether vertical or
horizontal, relaxes price competition in a one-sided market. 19 Similarly, on each side of a
two-sided market, the degree of competition faced by a given platform depends on the
degree of vertical and horizontal product differentiation on that side.
For example, the level of competition faced by a TV station on the advertising side depends
inter alia on the number of its viewers compared to other TV stations. For instance, if a TV
station has many more viewers than its rivals, one can expect a similar price increase on the
advertising side to lead to a smaller loss in advertising than if the TV stations were closer to
each other in terms of number of viewers. One can argue that from the advertisers’ point of
view TV stations are vertically differentiated in the number of viewers.

Moreover, the level of competition faced by a TV station on the advertising side is also
likely to depend ceteris paribus on the demographic composition of its viewers with
respect to that of the viewers of rival TV stations. To the extent that different advertisers
might value some demographic groups of viewers more than others, TV stations can also
be perceived as horizontally differentiated on the advertising side.
Market definition in one-sided markets typically takes product differentiation as given.
However, in a two-sided market both horizontal and vertical product differentiation is
largely determined by pricing decisions.
From the point of view of advertisers, TV stations are likely to be vertically differentiated
(because they have a different number of viewers) and horizontally differentiated (insofar
as they have different types of viewers). Yet both the number and the type of viewers also
depend on the price charged to viewers (whether positive or zero) and, to the extent that
viewers are annoyed by advertising, on the price charged to advertisers, which contributes
to determine the quantity of advertising in the TV station.
Thus, product differentiation on one side not only affects pricing decisions on that side
(as in one-sided markets), but may also depend on pricing decisions on the other side.
Pricing decisions on the two-sides are interrelated.
Hence, the competitive constraints faced by a platform in its pricing strategies can be
assessed only by taking into account both sides when defining the relevant market.
Moreover, neglecting one side of a two-sided market when the product on that side is
priced at zero is conceptually wrong. In fact, firms are competing also on that side.
For instance, one might think that traditional phone directories, that were distributed for
free, competed only on the advertising side. Yet, if a phone directory raised advertising
tariffs and experienced a drop in listings, it would likely suffer not only a direct drop in
profits but also an indirect drop in usage due to people finding less information in the
directory compared to competing directories. Similarly, if the phone directory
experienced a drop in the number of users, possibly because of the appearance of a
competing product of higher quality for users, it is likely that this would lead to a drop in
demand for ad slots from advertisers. The phone directory may then be forced to lower
the price charged to advertisers and/or experience a decrease in the amount of advertising
and in the corresponding revenues.
By failing to consider all sides in the definition of the relevant market one would then
ignore the real competitive pressure faced by the firms under consideration.
It is only in the particular case of a two-sided non-transaction market with only one
externality, that one could safely perform a market definition exercise, on the side of the
market that does not exert any externality, irrespective of the other side.
For example, in a case involving newspapers, if one finds that advertising has no effect on
the readers’ side of the market, one needs to take into account the advertising market
when defining the readers’ market but one can safely define the advertising market
irrespective of the readers’ market. In fact, in that case, whatever the pricing choices of
publishers on the advertising side, they will not affect the readers’ side. Hence, the
platform on the advertising side of the market will not behave differently from a firm in a
single-sided market facing the same advertising demand.

More generally, when defining the relevant market in the case of a multi-sided non-
transaction market, it is only necessary to consider all the other sides towards which the
side under consideration exerts an externality, either directly or indirectly. 20
6. The SSNIP test and the HM test
The most rigorous conceptual tool used to define the relevant market is the so-called
“Small-But-Significant-Non-Transitory Increase-in-Price Test” 21 (in short the SSNIP
test), which defines the market as the smallest set of substitute products 22 such that a
substantial (usually five or ten percent) and non-transitory (often one year) price increase
by a hypothetical monopolist would be profitable.
Starting from a set of candidate products, the SSNIP test is implemented by first
simulating a given price increase above the current level 23 by a hypothetical monopolist
who owns just one product 24 and, as long as that leads to estimated losses in profits,
progressively increasing the number of products owned by the monopolist and simulating
a price increase of all the products the monopolist owns. When the hypothetical
monopolist does not estimate profits to decline following a small but significant increase
in price, the set of products owned by the monopolist in the last simulation constitutes the
relevant market.
The SSNIP test is often performed by Critical Loss Analysis (CLA), for which formulas
are derived under the assumptions of constant marginal costs and either linear or constant
elasticity of demand. 25 Under these assumptions, performing a CLA is exactly identical to
performing the SSNIP test. 26
In any case, the idea behind the SSNIP test (and thus CLA) is that if the small but
significant non-transitory increase in price is unprofitable, then there exists at least one
close-enough substitute to the product whose price is raised. If so, the two products
should be in the same relevant market. And so on and so forth. Thus, both the SSNIP test
and CLA analysis set an implicit benchmark for substitutability between products to be in
the same relevant market.
In addition, the iterative procedure described above is designed to ensure that a relevant
market is defined as the smallest set of substitute products on which a monopolist would
find it profitable to increase prices by a small-but-significant amount; it thus makes sure
that the market is defined in such a way that a monopolist has market power, which is a
basic requirement of economic theory.
If order to preserve the same logic of the one-sided test, the SSNIP test (and CLA
analysis), should be modified differently according to the type of two-sided market:
• In a two-sided non-transaction market, one should check the overall profitability
of a rise in price on each side of the market.
• In a two-sided transaction market, one should instead check the profitability of an
increase in the price level (i.e. the sum of the prices paid for the transaction by the
two sides).
Ideally, in both cases one should allow the hypothetical monopolist to re-optimise the
price structure following the price increase. 27
Furthermore, in a two-sided transaction market, the SSNIP test should take into account
the changes in overall profits (i.e. the sum of the profits on both sides of the market) and

all feedbacks between the two sides of the market when judging the profitability of a
price increase.
Since positive indirect network effects between the different sides of the platform reduce
the profitability of any price increase, the risk of applying a one-sided SSNIP test, which
does not account for these feedback effects, is that in such cases the two markets may be
defined too narrowly.
Consider a two-sided platform with sides A and B linked by positive indirect network
effects. The application of a one-sided SSNIP test on side A would only account for the
direct effect that a price increase will have on the demand and profits of side A. It would
not account for the fact that a reduction of the number of customers on side A is likely to
lead to a reduction of the number of customers on side B so that, if the price on side B is
kept constant, there will be a loss in profits also on side B. It would also not envisage the
fact that the smaller number of customers on side B will in turn reduce the demand of side
A, and so on. Hence, it would also underestimate the loss in profits on side A. The iterative
procedure of the SSNIP test would then stop too early. Similarly for the application of a
one-sided test on side B. On both sides the market would be defined too narrowly.
In other words, in two-sided non-transaction markets with positive network effects, a one-
sided SSNIP test can provide a lower bound to the relevant market.
If instead one network effect were positive and one negative, the implications of applying
a one-sided SSNIP test, which does not account for these feedback effects, is that in such
cases the market may be defined too broadly on the side that exerts a negative externality
and may be defined either too narrowly or too broadly on the side that bears the negative
externality.
Consider a two-sided platform with side A exerting a negative externality on side B and
side B exerting a positive one on side A. The application of a one-sided SSNIP test on
side A would not account for the fact that a reduction of the number of customers on side
A is likely to lead to an increase of the number of customers on side B; so that, if the
price on side B is kept constant, there will also be an increase in profits on side B. It
would also not envisage the fact that the higher number of customers on side B will in
turn increase the demand of side A, and so on; so that, in the end, it would also
overestimate the loss in profits on side A. The iterative procedure of the SSNIP test
would then stop too late on side A. Hence, on that side, the market would be defined too
large. Similarly, the application of a one-sided test on side B would not take into account
the resulting loss in profits on side A and would overestimate the resulting loss in profits
on side B. The iterative procedure of the SSNIP test may then stop too early or too late on
side B. 28 Hence, on this side, the market may be defined too narrowly or too largely.
In other words, in two-sided non-transaction markets with one negative (and one positive)
network effect, a one-sided SSNIP test can provide a upper bound to the relevant market
on the side that exerts the negative externality and enjoys the positive one. It would not
instead be informative on the side of the market that exerts the positive externality and
bears the negative one.
Only in the presence of a single (positive) externality linking the two-sides of the market
could the traditional SSNIP test (and single-sided formulas for CLA) be safely applied in
a two-sided non-transaction market to define the market on the side that does not exert an
externality on the other.

Some authors have proposed that the SSNIP test (and CLA analysis) be performed
without allowing the hypothetical monopolist to re-optimise the price structure. 29
While using the standard single-sided SSNIP test or CLA formulas would lead to a too-
narrow or too-large definition of the relevant market, adopting a two-sided SSNIP test (or
using two-sided CLA formulas) that do not allow the HM to re-optimise the price
structure would lead to a too-large definition of a market. In fact, not allowing the price
structure to be re-optimised would always overestimate the loss in profits due to the
increase in prices, because by definition the optimal adjustment by the hypothetical
monopolist will tend to reduce such a loss.
Hence, both in two-sided transaction and non-transaction markets a two-sided SSNIP test
that does not allow the hypothetical monopolist to re-optimise the price structure can
provide an upper bound to the relevant market.
Finally, it is often the case in two-sided markets that customers on one side of the market
do not pay. Such a situation may arise both in transaction and non-transaction markets,
but it raises different issues in the two types of markets.
In a transaction market, one mainly needs to predict the likely reaction of non-paying
customers to a price increase. This can usually be done by designing an appropriate
survey of existing customers to elicit their willigness to pay. Once this is measured, in a
two-sided transaction market, the SSNIP test can be performed.
When the market is a non-transaction one, a two-sided SSNIP test can be safely
performed on the paying side of the market. However, on the side where the price is zero
it is not possible to perform a SSNIP test. Here the issue is not only that the reaction of
customers to a price increase is not known, but, more fundamentally, that increasing the
price by 5 or 10% has no meaning when the starting price is zero. Any price increase one
would consider would be arbitrary and change the benchmark with respect to the practice in
one-sided markets and the extension just discussed to the paying side of a two-sided market.
However, if the question of interest is whether the free product is in the same relevant
market with a product that is sold at a positive price, one could envisage performing the
SSNIP test starting from this other product and checking whether the test would lead to
adding the product of interest to the relevant market 30.
If instead the question of interest is whether the free product is in the same relevant
market of another free product, then one cannot resort to the SSNIP test.
In fact, it could be argued that in such a case the SSNIP test might even not make much
sense 31. In general, the price is only one dimension of competition among firms.
Conventionally, competition policy has considered it to be the most important dimension
of competition, leaving aside for instance choices on the variety or quality of the
products. The fact that on one side of the market the price is zero most probably indicates
that, on that side of the market, the most important dimension in which firms compete is
not the price. Most likely, competition takes place on quality or variety.
If the relevant competitive dimension is quality, one could envisage an alternative test,
similar to the SSNIP test, where the HM, rather than increasing price, would be
decreasing quality. Such a SSNDQ test has been proposed already for one-sided
markets 32. The starting assumptions are both that a decline in quality leads to a loss in
customers and that an HM would be more likely to find a decline in quality unprofitable
if the product it sells has fewer or less close substitutes. Then the iterative procedure
would be similar to the one of the SSNIP test.

The proposal of a SSNDQ test has not been very successful. In particular, it has been
argued that, since product differentiation is most often multi-dimensional, it is difficult to
establish what is the relevant quality dimension in practice. 33 More fundamentally, if, as it
is the case in one-sided market, customers are paying for the product, it is not certain that,
in the presence of substitute products, an HM would lower the quality of its product less. 34
However, differently from a one-sided market, on the non-paying side of a two-sided
market, given that the price is zero (and assuming it will remain zero), an HM would
most likely lower the quality of its product less in the presence of substitute products,
consistently with the assumption of the SSNDQ test. 35
On the non-paying side of a two-sided market, one can then envisage a SSNDQ test that
is performed by changing the quality and looking at profitability for an HM.
Importantly, as with the extension of the SSNIP test to two-sided markets, and for the
same reasons, such a test should look at overall profitability (i.e. profitability on both
sides) of the quality decrease and should take into account all feedbacks between the two
sides of the market.
While also in a two-sided market it is difficult to establish what is the relevant quality
dimension in practice, there is an obvious dimension that could be taken into account. In
fact, in a two-sided market, one important dimension of quality is, as already argued
above, the size of the network effect, i.e. the number of (some type of) users on the other
side of the market. Thus, identifying the dimension of quality due to the network effect
may be less contentious than in a one-sided market, once the market is established to be
two-sided and the presence of the relevant indirect network effect has been confirmed.
Hence, if the non-paying side bears an externality (whether negative or positive), one can
envisage a SSNDQ test that is performed by changing the quantity on the paying-side of
the market and looking at the profitability of the change for an HM.
Depending on whether the externality is negative or positive, such a SSNDQ test would
ask the HM to raise the network effect or lower it, respectively. For instance, in a case
involving TV stations, assuming it has been found that TV advertising annoys viewers,
one should ask the HM to raise advertising quantity, while in a case involving traditional
phone directories, having assessed that readers are interested in the amount of listings,
one should ask the HM to lower the number of listings.
Notably, the size of the network effect enjoyed or borne by customers on one side also
depends on the price paid by customers on the paying side of the market. Hence, in a two-
sided market in which one side does not pay, the quality on the non-paying side of the
market also depends on the price paid on the paying-side.
A SSNDQ test on the network effect on the non-paying side of the market would thus be
linked, albeit not equivalent, to the SSNIP test on the paying-side of the market.
More precisely, a high substitution towards a competing product on the non-paying side
of the market as indicated by the above SSNDQ test would contribute to a high
substitution on the paying-side of the market as indicated by a SSNIP test on the latter
side, but it would neither be sufficient nor necessary.

To conclude, although the relevant benchmark would clearly change by switching from a
test on price to a test on quality, such a SSNDQ test would allow competition authoritities
to apply the same logic as a SSNIP test.
Since in practice, the SSNIP test is rarely used in its mathematical form and is most often
seen as a conceptual tool to define the relevant market, such a SSNDQ test may be a
reasonable solution to adress the issue of market definition on the non-paying side of the
market when the candidate substitute product on that side of the market are for free.
When instead one or more of the candidate substitute products are paid for, it may be
preferable to perform a two-sided SSNIP test starting from one of these candidate
products, as discussed above, because in such a case it is harder to assume that price is
not the relevant dimension of competition.
7. Conclusions
Drawing from the economics of two-sided markets, I provided methodological

suggestions for the definition of the relevant market in cases involving multi-sided
platforms. In particular, I provided suggestions regarding a) how to identify the two-sided
nature of a market; b) when multi-sidedness should be taken into account; c) how many
markets should be defined; d) how the SSNIP or HM test should be performed; e) how
the relevant market should be defined when one-side of the market is free. I also
discussed when and to what extent one-sided methods may be harmless, or even useful.
My overall conclusion is that, while two-sided markets certainly need particular attention
from competition authorities, traditional antitrust tools for market definition can still be
useful, provided they are implemented taking into account the two-sided nature of the
market.
Notes
1 This definition is due to Evans (2003).

2 For a market to be two-sided, it is enough that one indirect network effect is present. For more
discussion what makes a market two-sided and on identifying two-sidedness in practice, see
Filistrucchi (2010) and Filistrucchi et al. (2013).
3 Demand is characterised by a direct network effect when consumers’ willingness to pay for a
product depends on the number of other consumers (or the quantity bought) of the same product;
demand is characterised by an indirect network effect when consumers’ willingness to pay for a
product depends on the number of consumers (or the quantity bought) of another product.
4 These conditions relate to the size and sign of the indirect network effects.
5 See Rochet and Tirole (2003).
6 This distinction has important implications for the assessment of the welfare impact of these
strategies.
7 This distinction was originally proposed by Filistrucchi (2008), who used however the terms
“two-sided markets of the media type” and “two-sided markets of the payment cards type”. It was
later renamed as above by Damme et al. (2010).
8 Note that in a media market, an interaction is often present between the two sides of the market in
that, for instance, a reader may read an ad placed by an advertiser. Such an interaction is even

observable online (when one clicks on an online ad to open it) and, in such a case, the platform
can charge for it. However, at best only a delayed transaction is present (when someone who saw
an ad buys the advertised product) and this transaction is usually not identifiable (as it is
impossible to say whether someone bought a product because he or she saw an ad), so that the
platform is unable to charge a fee for it. Only recently, using online tracking technologies, it has
become possible to charge advertisers for online transactions between an advertiser and an
internet user that buys a product online after having seen an online advertisement. The ability to
track purchases resulting from an ad are currently limited but such technological developments
may eventually push some media markets to become two-sided transaction markets.
9 Note however that the fact that a two-part tariff can be charged does not necessarily imply that it
will be charged. Indeed both or either of a membership fee and a per-transaction fee can be
charged. In fact, the crucial point is that a per-transaction fee can be charged. For example, for
most payment cards in Europe and the US, cardholders pay at most an annual fee, while
merchants pay a two-part tariff.
10 Other two-sided transaction platforms are virtual marketplaces, auction houses and operating
systems.
11 See Rochet and Tirole (2006).
12 I write “roughly” because prices on the two sides are in different units of measurement. For
instance, in the case of a newspaper, the cover price is per copy of the newspaper, while the
advertising tariff is per page or per column millimetre. Thus the price level is not simply the sum
of the two prices, but rather the sum of the two prices expressed in the same unit of measurement.
Again, in the case of newspapers the price level is the sum of the cover price and the per-copy
advertising revenues. Similarly, the price structure is the ratio of the two.
13 This will be discussed more in detail in the next section.
14 In practice, a two-sided market without a transaction is just an extreme case of a two-sided
market: one where no pass-through is possible. At the other extreme, when the pass-through is
complete, one finds a one-sided market. In the middle lie many different two-sided markets, those
in which some pass-through is possible, although not complete.
15 This will be discussed further in the next sections.
16 Rochet and Tirole (2006).
17 See Evans and Noel (2005).
18 See also Evans and Noel (2008).
19 Two products are said to be vertically differentiated (or differentiated on quality) when, if faced
with the same price, all consumers would buy one of them (the one with the highest quality). Two
products are instead horizontally differentiated (or differentiated on variety) when, even faced
with the same price, some consumers would buy one of them and others would buy the other
(because consumers have different tastes).
20 Indeed, in a multi-sided platform, side A could exert an externality on side B when customers on
side B value more customers on side A, but it could also exert an externality on side B when
customers on side B care about customers on side C and customers on side C care about
customers on side A. Both cases above would lead to equivalent suggestions with respect to
market definition on side A.
21 In the US, the corresponding test is the “hypothetical monopolist test” (HM test). The two tests are
slightly different. See Werden (2003) for a historical account of the ascent of the HM test.
22 For purely expositional reasons, I refer here only to the definition of the relevant product market
and not to the geographic market.

23 In fact, the current level is assumed to be competitive. This is a drawback of the test giving rise to
the so-called “cellophane fallacy” in one-sided markets. In two-sided markets the fallacy may or
may not arise depending on the sign and size of indirect network effects.
24 One of those of the merging parties in a merger case, one of those owned by the potentially
dominant firm in case of abuse of dominance.
25 Critical Loss Analysis works as follows: first, one calculates the so-called “critical loss”, which is
the maximum percentage loss in sales that can be sustained without a given price increase
becoming unprofitable; second, the “actual loss” is defined as the expected percentage loss
following the same price increase. If the actual loss is higher than the critical loss, it would not be
profitable to increase prices. Vice versa, it would be profitable.
26 CLA formulas are different in the EU and in the US, reflecting the difference between the SSNIP
test and the HM test. See Werden (2002a, 2002b).
27 This is proposed also by Emch and Thomson (2006) for two-sided transaction markets. It is
instead proposed by Filistrucchi et al. (2014) for two-sided non-transaction markets.
28 These results are based on a linear specification for the demand function. Linearity, however, is
often assumed in the application of the SSNIP test. As noted above, existing CLA formulas are
based on such an assumption.
29 See Evans and Noel (2008).
30 In fact, the SSNIP test is not a symmetric algorithm. See Werden (2002b). Hence, this could be
considered a second best solution,
31 See also Evans (2011).
32 See Hartmann et al. (1993).
33 See, for instance, OECD (2013).
34 For instance, in a vertical product differentiation like Mussa and Rosen (1978) or Shaked and
Sutton (1982), the lower quality firm finds it more profitable to lower quality exactly because it
has a competitor with a higher quality: by lowering quality, it differentiates more and relaxes
subsequent price competition.
35 Since in this case there is no price competition, by increasing quality, a lower quality firm would
steal customers from the higher quality firm.

References
Damme, E. van, L. Filistrucchi, D. Geradin, S. Keunen, T. Klein, T. Michielsen and J. Wileur, (2010):
“Mergers in Two-Sided Markets – A Report to the NMa”, Netherlands Competition Authority, pp. 1-183.
Emch E and T.S. Thomson (2006). “Market Definition and Market Power in Payment Card Networks,
The Review of Network Economics, 5(1); 45 – 60
Evans, D.S. (2003). “The Antitrust Economics of Multi-Sided Platform Markets”, Yale Journal on
Regulation, 20(2); 325-381.
Evans, D.S. (2009). “Two-Sided Market Definition”, Market Definition in Antitrust: Theory and Case
Studies, ABA Section of Antitrust Law.
Evans, D.S. (2011). “The Antitrust Economics of Free”, CPI Journal, Vol. 7 (1).
Evans, D.S and M.D. Noel (2005). “Defining Antitrust Markets When Firms Operate Two-Sided
Platforms.” Columbia Business Law Review, 667-702
Evans, D.S. and M.D. Noel (2008). “The Analysis of Mergers that involve Multisided Platform
Businesses”, Journal of Competition Law and Economics, 4(3), 663-695.
Filistrucchi, L. (2008). “A SSNIP Test for Two-Sided Markets: The Case of Media”, NET institute
working paper n°08-34.
Filistrucchi L., (2010), “How many markets are two-sided?”, CPI Journal, Volume 7 (2).
Filistrucchi, L., Geradin D. and Eric van Damme (2013). “Identifying Two-Sided Markets”, World
Competition, 36(1); 33-60.
Filistrucchi L., Geradin D., van Damme E., and Affeldt P. (2014), Market Definition in Two-Sided
Markets: Theory and Practice, Journal of Competition Law and Economics, vol. 10 (2), 293-339.
Filistrucchi L. and Tobias J. Klein (March 2013). “Price Competition in Two-Sided Markets with
Heterogeneous Consumers”, mimeo.
Hartman,R., Teece D., Mitchell W. and T. Jorde, (1993), “Assessing Market Power in Regimes of Rapid
Technological Change” Industrial and Corporate Change, vol. 3(2), 317-350.
Mussa, M. and Sherwin Rosen (1978), “Monopoly and Product Quality”, Journal of Economic Theory,
vol.18, 301-3017.
OECD (2013). “The Role and Measurement of Quality in Competition Analysis”, OECD.
Rochet, J-C and J. Tirole (2003). “Platform Competition in Two-Sided Markets”. Journal of the
European Economic Association, 1(4), 990-1029.
Rochet, J-C and J. Tirole (2006). “Two Sided Markets: A Progress Report”. Rand Journal of Economics,
37(3), 645-667.
Shaked, A. and J. Sutton (1982), “Relaxing Price Competition through Product Differentiation”, Review
of Economic Studies, Vol. 49 (1), 3-13.

Werden, G.J. (2002a). “Beyond Critical Loss: Tailoring Applications of the Hypothetical Monopolist
Paradigm”, US DOJ Antitrust Division Economic Analysis Group Discussion Paper No. 02-9.
Werden, G.J. (2002b). “Market Delineation Algorithms Based on the Hypothetical Monopolist
Paradigm”, US DOJ Antitrust Division Economic Analysis Group, Discussion Paper No. 02-8.
Werden, G.J. (2003). “The 1982 Merger Guidelines and the Ascent of the Hypothetical Monopolist
Paradigm”, 71 Antitrust L.J., 253–276.

2. Market definition in multi-sided markets
By Sebastian Wismer & Arno Rasek *
1. Introduction
One-sided vs. multi-sided markets

During the last one and a half decades, multi-sided markets have been a highly debated
topic among both researchers and practitioners. 1 A large part of the debate on this type of
markets has been focused on internet platforms and the digital economy. However, multi-
sidedness is not only an “online” phenomenon. Several traditional “offline” markets such
as markets for newspapers or magazines as well as payment card markets have been
identified to be multi-sided. 2
Although the question whether a market is one-sided or multi-sided sometimes is difficult
to answer, distinguishing between one-sided and multi-sided markets is a useful
conceptual approach: traditional “one-sided” logic may fail if firms simultaneously serve
different customer groups with interdependent demand, in particular if indirect network
effects are present. 3 There is, however, no consensus on which characteristics a market
must have to be defined as a multi-sided market. 4 While a firm that is active in a multi-
sided market generally must serve at least two distinct customer groups (which constitute
the different “sides” of the market), most definitions stipulate that there are indirect
network effects between these two or more customer groups. The presence of indirect
network effects between market sides affects the price setting mechanism and the
competitive interaction in these markets.
It is worth noting that multi-sidedness is not strictly a “binary” but rather a gradual
phenomenon. While conceptually the discussion often revolves around an adequate
definition of multi-sidedness and, subsequently, whether certain types of markets or
businesses are multi-sided, in practice the question of how important multi-sided issues
are in a certain market seems more relevant. 5 Thus, even if indirect network effects may
be present in many markets, it should be investigated case by case to what extent they
influence firms’ behavior and market outcomes.
The role of market definition

Due to indirect network effects, the antitrust assessment is typically more complex in
multi-sided markets. This is also true for market definition. To tackle the specific
challenges of market definition in multi-sided markets, it is helpful to recall the role of
market definition as part of the case analysis.
*
Both authors are affiliated with the Bundeskartellamt, Bonn. Arno Rasek is Chief Economist,
Sebastian Wismer is Case Officer within the General Policy Division.

While economists often abstract from market definition within their theoretical models,
practitioners need to get at least some notion about the definition of the relevant market.
Market definition helps to identify customer demand and relevant competitors. 6 Market
definition should inform the competitive assessment and organise it. However, market
definition should not be seen as an end in itself, but a first important step that helps to
assess competitive constraints, market power, and the effects of the behavior at stake. 7
Economists often struggle with the binary nature of market definition and the impact it
can have on the antitrust analysis, in particular as the level of certain market power
indicators depends on market definition. Thus the binary concept has been enriched by
more nuanced concepts such as closeness of competition. In general, the competitive
assessment in a certain case and the definition of the relevant market(s) can be seen as
“communicating vessels”. 8 In principle, a narrow market definition often goes along with
an indication of substantial market power, e.g. a high market share, while a wide market
definition tends to suggest little market power. However, such indications should always
be put into perspective and may in certain cases also be refuted or confirmed by other
circumstances, for instance a detailed analysis of closeness of competition, potential
competition or imperfect (fringe) substitution. 9
As multi-sided markets involve distinct groups of customers which may or may not be
attributed to distinct (but interdependent) markets, these principles on the role of market
definition often become even more important in multi-sided markets. In particular, due to
interdependencies between markets, the (stand-alone) value of market definition may
even be more limited than in one-sided markets.
Structure of the paper

In line with the request of the Chairman of the Competition Committee, we will focus on
practical proposals on how agencies might deal with market definition in multi-sided
markets rather than on theoretical questions or policy issues. In the following, we will
first discuss the two approaches to capture the structure of multi-sided markets: defining
separate markets for each market side or defining a single market encompassing all
customer groups of a platform. Second, we will briefly explain how multi-homing or
single-homing can affect market definition. Third, we will deal with some further
challenges when applying traditional methods for market definition to multi-sided
markets. Finally, we will present some concluding remarks.
Throughout this paper (and also in most of the literature on multi-sided markets) firms
that are active in multi-sided markets are called ‘platforms’. It should be noted that the
term ‘platform’ in this sense also includes offline firms.
2. One single market vs. separate markets for distinct market sides
As multi-sided markets involve distinct groups of customers, there are in principle two
alternative approaches to capture their specific structure: defining separate markets for
each customer group or defining a single market encompassing all customer groups.
Pros and cons of the two alternatives

Both approaches have their strengths and weaknesses, which in particular depend on the
individual circumstances of a sector and the nature of the services at hand.
Defining separate markets can be done straightforward by capturing the competitive
landscape on each ‘side’ of the market one after the other. In comparing the competitive

forces identified within these separate markets, it is easy to identify whether the set of
relevant product substitutes/competitors or the geographic scope differ across markets. In
particular, the analysis may illustrate that a platform operator is dominant, but possibly
not on all market ‘sides’. For example, if one customer group predominantly practices
single-homing while another one practices multi-homing, there might be fierce
competition to attract customers from the single-homing group, but little competition for
customers from the multi-homing group. 10 Overall, with separate markets, it seems
relatively unlikely that the analysis will miss any competition issue that evolves on one of
the ‘sides’ of the market.
However, defining separate markets for each customer group may be inappropriate if the
different groups are inseparably linked by a platform interaction, in particular if a
platform’s service necessarily involves all customer groups. Furthermore, the competitive
analysis may be done repeatedly without gaining additional insights if the set and the
relevance of competitors as well as the geographic scope do not differ across market
‘sides’. Moreover, the risk of missing relevant effects driven by interdependencies
between different customer groups such as indirect network effects seems higher with
separate markets. These aspects militate in favour of defining a single market
encompassing all customer groups. 11
In principle, both approaches seem to be in line with the concept of demand-side
substitutability; in particular, defining one single market does not conflict with this
concept as a platform can be understood as a provider of an intermediation service,
serving linked user groups with essentially the same service. All in all, and given the role
of market definition as a tool that supports competitive analysis, neither of the two
approaches seems right or wrong in absolute terms as long as the analysis appropriately
accounts for interdependencies –such as indirect network effects– and for all competitive
forces on each ‘side’ of the market.
Types of platforms and types of network effects as potential guidelines

While all multi-sided markets are characterised by the presence of several groups of
customers among which a certain kind of interaction takes place, the interaction’s type
and objective as well as the role of the platform operator can differ. The following
characteristics can serve as guidelines when choosing how to capture the actual market
structure.
One distinction may be drawn between transaction platforms and non-transaction
platforms. 12 A transaction platform can be defined as an intermediary whose aim is to
enable direct (observable) 13 transactions between two distinct customer groups. Both
groups share the same objective, i.e. to conduct a transaction (such as the trading of a
product) with the respective other side. There are positive bilateral indirect network
effects between the two groups that are internalised by the transaction platform. One side
by itself would not be sufficient for the service offered by the platform, i.e. multi-
sidedness is not a non-mandatory option but an essential part of the service. In contrast,
non-transaction platforms mediate a different kind of interaction and do not necessarily
exhibit bilateral positive network effects. Enabling interactions is not always an integral
part of their service. In particular, some non-transaction platforms may be launched with
one side only, and the second side may be added at a later stage. A media platform, such
as a newspaper, for example, is able to generate a wide readership by providing editorial
contents, and later offer the platform to advertising companies for their purposes. In this
case, the readers are interested in the editorial contents of a newspaper, while the

advertisers want to attract the readers’ attention. Consequently, it is not always necessary
for non-transaction platforms to bring both groups of users on board, as some of these
platforms could also exist without one of the two groups. Establishing such non-
transaction platforms can therefore be understood as a strategic business decision of a
firm that would also serve its purpose with only one of the customer groups. 14 All in all,
this suggests defining one single market in the case of a transaction platform while
defining distinct markets in the case of a non-transaction platform. 15
Another similar distinction may be made between “matching platforms” and “audience
providing/advertising platforms”. 16 A matching platform can be described by its objective
to enable the best possible match between different user groups. This objective is shared
by all user groups involved. Although this characterisation partly overlaps with the
definition of a transaction platform, a matching platform may also enable interactions
which do not necessarily imply a subsequent (observable) transaction between user
groups. One example of this type are dating platforms. Although certain matching
platforms also exhibit (negative) direct network effects, 17 they always have positive
bilateral indirect network effects. Hence, transaction platforms can be seen as a sub-
category of matching platforms. In contrast, audience providing platforms or advertising
platforms provide one user group, e.g. advertisers, with the audience or attention of
another user group, e.g. readers. The platform facilitates an interaction between users and
advertisers in the form of a subsequent contact resulting from users reacting to the
advertisement (for instance, by clicking on the ad). Although there might be a certain
matching process involved, the characteristic indirect network effect is unidirectional,
benefiting the advertisers. All in all, this suggests defining one single market in the case
of a matching platform while defining distinct markets in the other cases.
Along with these potential guidelines, it can be useful to investigate the role of the
platform in detail –notably, the extent to which the platform is involved in the interaction
that it enables. On the one hand, this may involve legal questions such as whether the
operator acts as a commission agent or trade representative or bears a substantial part of
specific risks; under certain circumstances these issues are connected with further
questions as to the applicability of specific competition law provisions or, in particular,
the Vertical Block Exemption Regulation. 18 On the other hand, this may lead to
conceptual questions such as whether it is more appropriate to interpret certain market
structures as vertical (upstream and downstream market) rather than two sides of a
platform. 19 However, certain aspects arising in vertical structures, e.g. demand for a wide
range of products within wholesale or retail markets, can have similar implications as
indirect network effects have within multi-sided markets.
Case examples
In Germany, the Bundeskartellamt has identified newspapers as well as magazines as
platforms, i.e. firms that operate in a multi-sided market. However, it has defined two
distinct antitrust markets for readers and advertisers. 20 This seems reasonable since
newspapers and magazines usually do not enable a direct transaction between readers and
advertisers, as they do not necessarily need to get advertisers ‘on board’ to serve readers,
and as the products considered as substitutes usually differ between readers and
advertisers. In contrast, in the case of a merger of two online real estate platforms, the
Bundeskartellamt tended towards defining a single market including both customer
groups, although it ultimately left the market definition open. 21 In a merger decision
concerning online dating platforms, the Bundeskartellamt explicitly defined a common
market including both user groups that are matched by a dating platform. 22 In its decision

on a merger involving a supplier of ticketing solutions and a concert promoter, the

Bundeskartellamt identified the market for ticketing systems to be multi-sided, but
considered the supply of a ticketing system towards event promoters as an upstream
market and the supply of a ticketing system towards ticket agencies as a downstream
market. Accordingly, it defined two separate markets, in particular to account for the
commissioning activities provided by the ticketing system supplier. 23
It seems that the European Commission in most cases did not explicitly address the
question whether one single market including several groups of customers should be
defined in cases concerning multi-sided markets. 24 However, in the merger case
Travelport/Worldspan the Commission intensively assessed multi-sidedness, and in
particular indirect network effects, in “Global Distribution Services” (“GDS”). The
Commission seemed to apply a single market definition. However, the Commission
considered both market sides to be in a vertical relationship – an upstream market for
flight and travel service providers and a downstream market for travel agents. The
Commission did not consider the intermediary service as a product, i.e., matching by the
GDS platform was not considered in the context of market definition. 25
Free-of-charge services
In multi-sided markets it can be frequently observed that the platform operator charges
only one customer group while the service is offered for free to another customer group.
There has been some debate as to whether free-of-charge antitrust markets should be
defined. In Germany, the Düsseldorf Higher Regional Court even held that such markets
cannot ‘exist’ in antitrust terms 26 which caused a legislative clarification. 27 It is true that
where there are payments between a supplier and a customer there always exists an
antitrust market. But the inverse conclusion should not be drawn.
Irrespective of whether one single market or separate markets are defined, services
offered free of charge should be considered as (part of) an antitrust market if there exist
indirect network effects between the group that is served without being charged and
another group that is charged. 28 When ignoring one side of a multi-sided market,
important competitive aspects might be missed, as there usually is competition for
customers no matter whether they are paying customers or not. In fact, a customer group
being not charged might be due to intense competition for these customers. However, the
fact that a service is offered free of charge on its own should not justify the definition of a
separate market, in particular as the (zero) pricing decision may reflect both competition
and network effects, and, hence, may be associated with the strategic pricing decision
towards other customer groups. Consequently, when both paid and free-of-charge
services are offered in parallel, it seems reasonable to consider free-of-charge services as
competing services instead of ignoring them.
The approach proposed here also offers a straight-forward answer to the currently
intensely debated question of whether data should be viewed as a ‘currency’ in the
context of internet platforms: 29 for a free-of-charge antitrust market to ‘exist’ it should
not be a requirement that it must essentially be a bundle that comprises a good with a
positive value for the customers (i.e. the platform service) and a good with a negative
value for the customers (i.e. ads, use of their data) which can be viewed akin to a
‘payment’ for the platform service. The reason is that in multi-sided markets, setting a
price of zero for one customer group may make perfect sense for the platform provider
also if the service does not come along with any negative good tied to it. Instead, the
relevant question for the platform provider is to what extent he can monetise the presence

of these customers on other market sides. For the purposes of market definition for
internet platforms, there should thus be no need for the agency to establish that providing
data is of negative value to customers or to even quantify this negative value. As free-of-
charge markets may be defined due to the existence of a different customer group being
charged, there is no need to find a ‘currency’ from the viewpoint of the customers that are
not being charged.
Summarising remarks
Defining one single market seems reasonable for services which mainly aim at enabling a
direct (observable) transaction between different groups, e.g. in the case of a trading
platform that brings together sellers and buyers. In particular, this approach seems
feasible if (i) a firm’s service necessarily involves all groups and (ii) the set of substitutes
and their respective relevance from the perspective of each customer group does not
differ significantly across groups. Otherwise, in particular if the products or services
considered as substitutes (and, hence, competition conditions) differ substantially across
groups, defining a separate market for each distinct customer group seems more
appropriate; in these cases, the resulting markets usually differ in product and/or
geographic scope. These constellations are more likely to exist in cases with non-
transaction or audience providing/advertising platforms. However, market definition and
the choice between the two approaches need to be done on a case-by-case basis.
3. Product market definition with multi-homing and single-homing
While the previous section focused on the question of whether separate antitrust markets
should be defined for different sides of a multi-sided market, the following section deals
with the question of whether two platforms belong to the same product market(s) or not.
In principle, the factors relevant for product market definition in single-sided markets
equally apply to multi-sided markets. However, there is a specific phenomenon (more)
frequently found in multi-sided markets that may have significant impact on the antitrust
analysis. In multi-sided markets, pricing and market outcomes depend, among other
things, on whether customers choose a single platform (single-homing) or use more than
one platform simultaneously (multi-homing). In particular, a relatively high degree of
multi-homing within a group of customers may indicate a low level of competition for
these customers, while a relatively high degree of single-homing within a customer group
may indicate intense competition for those customers. 30
Multi-homing: Substitute or non-substitute use of different platforms

In general, there can be different reasons for customers’ multi-homing. 31 The most
evident reason seems to be product differentiation, i.e. differences between the platforms’
services, e.g. in terms of functionalities. Similar as in one-sided markets, depending on
the degree of these differences and customers’ preferences towards them, two platforms
may be attributed to different markets. However, even platforms that offer similar
services/functionalities may differ in terms of customers’ usage behaviour. Furthermore,
even if platforms do not differ in their customers’ usage behaviour, “endogenous”
differentiation may evolve, induced by the composition of their customers. Both kinds of
differentiation can rationalise customers’ decisions on multi-homing and may justify
defining narrow product markets.

In some cases multi-homing can indicate that customers use different platforms in parallel
to cover different needs, even though the platforms’ services may be similar at first view.
For example, in its decision concerning the merger of Microsoft and LinkedIn, the
European Commission distinguished between professional and personal social networks,
in particular because they are used for different purposes and in different ways, although
the technical functionalities of both types of social networks feature several similarities.32
In practice, it is often possible for a competition agency to gain insights on the extent of
multi-homing. However, it might be challenging to interpret this information. Multi-
homing may be a factor mitigating the probability of ‘tipping’ if the two platforms are
substitutes. Multi-homing also tends to reduce the relevance of indirect network effects: if
all customers of one group are present on all platforms, the number of these customers
does not affect the choice between platforms made by members of other groups. 33 Multi-
homing may, however, also indicate that the platforms are not (direct) competitors, while
multi-homing figures alone do not tell us anything about substitutability.
Although the literature on multi-sided markets analyses the impact of multi-homing on
platforms’ decisions and market outcomes in several facets, there seem to be no
contributions that focus on the implications of multi-homing on market definition. Where
one or several customer groups practice multi-homing, agencies should try to investigate
the customers’ multi-homing rationales and consider further splitting of the market, thus
segregating platforms that are used for different purposes and, hence, are not direct
competitors.
Single-homing and platforms as “bottlenecks”

As indicated above, customers’ choices between single-homing and multi-homing can
affect competition and there can be different reasons for customers’ multi-homing. In
particular, if one customer group, S, is single-homing, a distinct customer group from
another ‘side’, M, might be interested in interacting with members of group S that are
using different platforms, leading to multi-homing by M’s members. I.e. customers from
group M may value a certain “reach” in order to be able to (potentially) interact with
many members of group S; or customers from group M are interested in reaching specific
members of group S that are dispersed across several platforms. In these cases, one or
more platforms can become “bottlenecks” that provide exclusive access to single-homing
customers. 34 This means that one platform or even several similar platforms may possess
market power vis-a-vis customers of group M. Where market power is high it might be
reasonable to define a market that comprises only one platform (at least on market side
M). For example, in the context of the communications sector, wholesale call termination
markets are defined separately for each terminating operator's network as there are no
substitutes for terminating a call to a specific subscriber’s telephone line that belongs to
the network of one single operator. 35 However, if a platform fiercely competes with other
platforms for single-homing customers, which limits the platform’s market power, it
might also be appropriate to include all of these platforms in one market. Similar to cases
in which platforms are used for different purposes, it would be advisable to try to
investigate the customers’ rationale for multi-homing.
Summarising remarks
Customers’ single-homing and multi-homing behaviour can be relevant for market
definition. Much will depend on the underlying rationales. Multi-homing and single-
homing may both justify narrowly defined markets, but the rationale for defining markets

narrowly is quite different. ‘Multi-homing’ may reflect product differences, whereas

‘single-homing’ may indicate that platforms are bottlenecks.
4. Further challenges when applying traditional methods for market definition in

multi-sided markets
In the following, we will illustrate several challenges as well as peculiarities that arise
when applying traditional methods for market definition in multi-sided markets. The first
part deals with the SSNIP test as a widespread framework which, however, seems
difficult to apply in practice in multi-sided markets. The second part covers some other
quantitative methods, while the third part addresses the role of qualitative evidence.
SSNIP test
One concept that can assist in market definition is the so called SSNIP test. The SSNIP
test was originally developed for one-sided markets. 36 However, due to demanding data
requirements and serious operationalisation issues, the concept should rather be viewed as
an analytical framework as opposed to an easily quantifiable ‘test’.
The original SSNIP test does not account for interdependencies between distinct customer
groups. In a two-sided market, for example, a price increase for one customer group (side
A) leads to changes in demand not only on this side, A, but also on the other side, B.
Ignoring such volume changes that emanate from indirect network effects may distort the
result of the SSNIP test. 37 In case of multilateral positive indirect network effects the
profitability of a price increase would be overestimated, suggesting ‘too narrow’ markets.
Furthermore, even when accounting for volume changes caused by indirect network
effects, the profitability of a (unilateral) price increase also depends on whether prices for
other customer groups can be adjusted. 38
Although approaches to modify the SSNIP test to account for indirect network effects can
be found in the literature, 39 the concept remains difficult to use in multi-sided markets. 40
In practice, the main issues include the lack of proper data on a specific industry (while
data requirements are higher in multi-sided markets), handling of free-of-charge services
as well as the identification and operationalisation of competitive dimensions besides the
price (which might be even more relevant in multi-sided markets). In particular,
modelling and measuring network effects is a non-trivial task, but it is crucial for the
analysis of the SSNIP test as a platform’s pricing leeway may be limited by multilateral
positive network effects or increased by negative network effects. While the sign
(positive or negative) can typically be established, possibly by using qualitative evidence,
the strength as well as the shape of network effects seem difficult to quantify.
Furthermore, multi-sided markets may be especially prone to a “cellophane fallacy” due
to concentration tendencies that multi-sided markets may exhibit. Given these problems,
it is not surprising that so far competition authorities do not seem to have applied a
modified version of the SSNIP test that accounts for multi-sidedness. 41
Other quantitative methods

Other quantitative methods such as the estimation of demand functions, elasticities or
diversion ratios may involve similar issues. When explaining changes in demand
triggered by variations in price or other strategic variables, indirect network effects
should be accounted for. In particular, if multilateral positive indirect network effects are
present, but not taken into account in the estimation of (long-run) demand reactions, the

direct effect of a variation of a strategic variable on the respective firm’s demand is likely
to be overestimated, as part of the demand reaction is driven by a feedback effect.42
However, disentangling these effects in a robust way seems difficult in practice, if proper
data are available at all. Data retrievable for the specific market under review will
typically not contain sufficient (observable) variation with regard to the presence of
indirect network effects that would allow for an econometric quantification of indirect
network effects.
Less complex methods that abstract from modelling demand, such as price correlation
analyses, seem to be more easily applicable. However, multi-sidedness may complicate
the interpretation of calculated substitutability indicators, e.g. correlations, as additional
indirect network effects interfere with substitution as a (direct) reaction on a certain
variation, e.g. a price change. Furthermore, the amount of time until indirect network
effects fully unfold a feedback effect may vary, so the analysis may need to comprise
(different) time lags.
Beyond econometric analyses, it is often useful to apply descriptive quantitative methods.
For example, the matching of customer lists of different platforms can be used to
determine the degree and importance of multi-homing or to identify common customers
and their characteristics. Furthermore, it can be helpful to examine the size of customer
groups and the volume of new subscribers/customers over several periods, in particular if
a party submits that pronounced switching has occurred between certain platforms, as this
may also be reflected in the customer structure or group sizes. In addition, similar as in
one-sided markets, determining catchment areas on the basis of customer locations can be
meaningful when defining the geographic market; however, in multi-sided markets
additional insights can be gained from analysing whether indirect network effects depend
on the location of customers from other groups. If advertisers, for example, are
predominantly interested in targeting customers of a platform who are resident in a
certain region, this may lead to a corresponding segmentation of the market by regions,
even if the advertisers themselves may be based in different regions or countries. Results
of such descriptive methods are often helpful, especially when they complement
qualitative evidence.
Qualitative evidence
Qualitative evidence is (more) frequently used by competition authorities. In particular,
tools such as market studies or an assessment of the consumers’ and other competitors’
points of view can be rather helpful for defining the relevant market(s). 43 Moreover,
surveys and internal documents can often be helpful, e.g. in understanding firms’
rationales behind certain strategic (re)actions or identifying the set of competitors that a
firm perceives and monitors.
Customer surveys in one-sided markets involve well-known problems, e.g. answers to
certain questions from competition authorities might sometimes be biased strategically,
and stated preferences might differ from real reactions.44 In multi-sided markets
additional issues may arise. When investigating stated preferences, in particular, an
implicit or explicit assumption on “other things being equal” might be misleading, as the
choice between alternative offers in presence of network effects also depends on the
choices of other customers. For example, when asking customers about their hypothetical
reaction to a price increase, they may respond to such a question under the (wrong)
implicit assumption that the price increase will not induce any other customer to leave the
platform. Hence, on the one hand it can be useful to assess how important network effects

are for the choices of each customer group, but on the other hand questions concerning
the (hypothetical) substitutability of offers become complicated when both product
characteristics (including price) and network effects drive respondents’ real choices.
Summarising remarks
Competition authorities frequently face the challenge of choosing among investigation
tools which exhibit different strengths and weaknesses and differ in their resource
requirements as well as their reliability. In many cases, authorities refrain from applying
complex econometric methods, in particular due to time constraints, lack of proper data or
methodical complexity which often comes along with limited robustness and difficulties
in interpreting and communicating results.
In multi-sided markets, the analytical complexity is higher if compared to markets
without network effects. Consequently, it seems natural to lean towards simple tools with
a lower degree of complexity. The extent and impact of network effects on both platforms
and their customers should be assessed (at least) qualitatively, in particular to mitigate the
risk of misinterpreting results from established ‘one-sided’ tools.
5. Conclusion
Although there seems to be no clear-cut distinction between one-sided and multi-sided

markets, some specific features of multi-sided markets, especially indirect network
effects, require special attention.
As in one-sided markets, market definition and the further competitive assessment can be
seen as ‘communicating vessels’. 45 This metaphor works very well for the different sides
of a multi-sided market, too, where the interdependencies between market sides
(‘vessels’) can be understood as a ‘communicating’ element. 46 Consequently, just as the
market definition analysis should be closely linked with the further competitive
assessment, the different sides of a multi-sided market should also be analysed in close
relation to one another, especially when defining separate markets for different market
sides.
Defining one single market or defining separate markets for distinct market sides are both
viable and “correct” approaches as long as the further analysis appropriately accounts for
interdependencies between different sides, and also for all relevant competitive forces on
each side of the market.
Beyond this decision, customers’ multi-homing behaviour can be relevant for market
definition. Depending on the underlying rationales, both multi-homing and single-homing
may justify defining narrow markets.
When applying traditional methods for market definition in multi-sided markets, further
challenges may arise, especially with advanced quantitative (econometric) methods.
Given the analytical complexity of multi-sidedness, a holistic look at market
circumstances seems even more important in multi-sided markets than in one-sided
markets.
Notes

1 Cf. e.g. Evans and Schmalensee, ‘The Antitrust Analysis of Multi-Sided Platform Businesses’ in
Blair and Sokol (eds), The Oxford Handbook of International Antitrust Economics, vol. 1 (New
York, Oxford University Press 2015), and OECD, ‘Two-Sided Markets’ (2009) Best Practice
Roundtables on Competition Policy.
2 Cf. e.g. Funke/Springer Programmzeitschriften (Case B6-98/13) Bundeskartellamt Decision 25
April 2014, para 138; Zeitungsverlag Schwäbisch Hall (Case B6-150/08) Bundeskartellamt
Decision 21 April 2009, para 33; Visa MIF (Case AT.39398) Commission Decision 26 February
2014 OJ C 168, para 16.
3 Cf. e.g. Wright, ‘One-sided logic in two-sided markets’ (2004) 3:1 Review of Network
Economics; Schiff, ‘The ‘waterbed’ effect and price regulation’ (2008) 7:3 Review of Network
Economics; King, ‘Two-sided markets’ (2013) 46:2 The Australian Economic Review 247-258.
4 Cf. e.g. Hagiu and Wright, ‘Multi-sided platforms’ (2015) 43 International Journal of Industrial
Organization 162-174.
5 Also cf. Rysman, ‘The Economics of Two-Sided Markets’ (2009) 23:3 Journal of Economic
Perspectives 125-143.
6 Also cf. OECD, ‘Market Definition’ (2012) Best Practice Roundtables on Competition Policy.
7 Cf. e.g. ICN Merger Guidelines Workbook, April 2006, p. 15.
8 Cf. e.g. Ewald, ‘Der SIEC-Test im deutschen Recht: Grundansatz, materielle Detailfragen und
praktische Auswirkungen aus ökonomischer Sicht’ (2014) 3 Wirtschaft und Wettbewerb 261-281.
9 Also cf. Bundeskartellamt, ’Guidance on Substantive Merger Control’ (2012) paras 77-78.
10 Cf. e.g. Armstrong, ‘Competition in two-sided markets’ (2006) 37:3 RAND Journal of Economics
680.
11 Also cf. Evans and Noel, ‘The analysis of mergers that involve multisided platform businesses’
(2008) 4:3 Journal of Competition Law and Economics 674, and Monopolies Commission,
‘Competition policy: The challenge of digital markets’ (2015), Special Report No 68, para 58.
12 Filistrucchi, Geradin, van Damme and Affeldt, ‘Market definition in two-sided markets: Theory
and practice’ (2014) 10:2 Journal of Competition Law and Economics 293-339; Luchetta, ‘Is the
Google platform a two-sided market’ (2014) 10:1 Journal of Competition Law and Economics
185-207.
13 Observability (or, more precisely, verifiability) facilitates the platform charging transaction-based
tariffs, extending the space of feasible contracts.
14 Luchetta, ‘Is the Google platform a two-sided market’ (2014) 10:1 Journal of Competition Law
and Economics 192.
15 One may also argue that a distinction based on the platforms’ actual tariff system(s) should be
made; in the case of purely transaction-based fees, defining separate markets might be less
reasonable than defining a single market, cf. Wright, ‘One-sided logic in two-sided markets’
(2004) 3:1 Review of Network Economics 62.
16 Cf. Bundeskartellamt, B6-113/15, Working Paper – The Market Power of Platforms and
Networks, June 2016.
17 Cf. e.g. Goos, van Cayseele and Willekens, ‘Platform pricing in matching markets’ (2013) 12:4
Review of Network Economics 437-457.
18 Cf. e.g. CTS Eventim/FKP Scorpio (Case B6-53/16) Bundeskartellamt Decision 3 January 2017,
paras 101-122.

19 Cf. Hagiu and Wright, ‘Multi-sided platforms’ (2015) International Journal of Industrial
Organization 43 162-174, and Hagiu and Wright, ‘Marketplace or reseller?’ (2015) 61:1
Management Science 184-203.
20 See fn. 2.
21 Immonet/Immowelt (Case B6-39/15) Bundeskartellamt Decision 20 April 2015, case summary
available at www.bundeskartellamt.de.
22 Parship/Elitepartner (Case B6-57/15) Bundeskartellamt Decision 22 October 2015, paras 71-79.
23 CTS Eventim/FKP Scorpio (Case B6-53/16) Bundeskartellamt Decision 3 January 2017, paras
101-122.
24 Google/DoubleClick (Case COMP/M.4731) Commission Decision 11 March 2008 OJ C 184;
Microsoft/Yahoo (Case COMP/M.5727) Commission Decision 18 February 2010 OJ C 020;
Microsoft/Skype (Case COMP/M.6281) Commission Decision 7 October 2011 OJ C 341;
Google/Motorola Mobility (Case COMP/M.6381) Commission Decision 13 February 2012 OJ C
75; Facebook/WhatsApp (Case COMP/M.7217) Commission Decision 3 October 2014 OJ C 417.
25 Travelport/Worldspan (Case COMP/M.4523) Commission Decision 21 August 2007 OJ L 314.
For further case examples, see e.g. Filistrucchi, Geradin, van Damme and Affeldt, ‘Market
definition in two-sided markets: Theory and practice’ (2014) 10:2 Journal of Competition Law
and Economics 293-339.
26 HRS (Case VI Kart 1/14 (V)), Düsseldorf Higher Regional Court 9 January 2015, para 43.
27 In March 2017, the German Parliament passed the Federal Government Bill on the Ninth
Amendment of the German Competition Act; § 18 para. 2a of this Bill explicitly clarifies that
services’ being offered free-of-charge does not conflict with defining an antitrust market.
28 This approach is also in line with the practice of the European Commission that dealt with several
markets including services without charge, cf. fn. 24.
29 Cf. e.g. Schepp and Wambach, ‘On big data and its relevance for market power assessment‘
(2016) Journal of European Competition Law and Practice 7:2 120-124; Körber, ‘Analoges
Kartellrecht für digitale Märkte?’ (2015) 2 Wirtschaft und Wettbewerb 120-133.
30 Cf. e.g. Rochet and Tirole, ‘Two-sided markets: a progress report’ (2006) 37:3 RAND Journal of
Economics 645-667, or Armstrong, ‘Competition in two-sided markets’ (2006) 37:3 RAND
Journal of Economics 668-691.
31 Cf. e.g. Travelport/Worldspan (Case COMP/M.4523) Commission Decision 21 August 2007 OJ L
314 para 13-20.
32 Microsoft/LinkedIn (Case Comp/M.8124) Commission Decision 6 December 2016 para 103-110.
However, it seems that the Commission did not consider multi-homing within the context of
market definition in its decision.
33 Cf. Travelport/Worldspan (Case COMP/M.4523) Commission Decision 21 August 2007 OJ L
314 para 79-80.
34 Also cf. Travelport/Worldspan (Case COMP/M.4523) Commission Decision 21 August 2007 OJ
L 314 para 77-81, and Armstrong, ‘Competition in two-sided markets’ (2006) 37:3 RAND Journal
of Economics 668-691.
35 Cf. e.g. European Commission, ‘Explanatory Note accompanying the Commission
Recommendation on relevant product and service markets within the electronic communications
sector’ SWD(2014) 298, p.28.

36 Starting from a very narrow candidate market, the test asks whether a small but significant and
non-transitory increase in price (“SSNIP”) would be profitable from the perspective of a
hypothetical monopolist in the candidate market. If a SSNIP is not profitable, there probably
exists at least one further relevant substitute product which has not be taken into account. In this
case, it is suggested that the candidate market be expanded until a SSNIP will be profitable from
the perspective of a hypothetical monopolist.
37 Cf. e.g. Evans and Noel, ‘The analysis of mergers that involve multisided platform businesses’
(2008) 4:3 Journal of Competition Law and Economics 663-695, Evans and Noel, ‘Defining
Antitrust Markets When Firms Operate Two-Sided Platforms’ (2005) 3 Columbia Business Law
Review 667-702.
38 Cf. Filistrucchi, Klein & Michielsen, ‘Assessing unilateral merger effects in a two-sided market:
an application to the Dutch daily newspaper market’ (2012) 8:2 Journal of Competition Law and
Economics 322, for an exemplary (numerical) illustration of the application of different modified
versions of the SSNIP test with and without optimal adjustment of the two-sided pricing structure.
39 Cf. Filistrucchi, Geradin, van Damme and Affeldt, ‘Market definition in two-sided markets:
Theory and practice’ (2014) 10:2 Journal of Competition Law and Economics 293-339, and Evans
and Noel, ‘The analysis of mergers that involve multisided platform businesses’ (2008) 4:3
Journal of Competition Law and Economics 663-695.
40 Cf. e.g. Dewenter, Rösch and Terschüren, ‘Abgrenzung zweiseitiger Märkte am Beispiel von
Internetsuchmaschinen‘ (2014) 2 NZKart Neue Zeitschrift für Kartellrecht 387-394, Kehder,
‘Konzepte und Methoden der Marktabgrenzung und ihre Anwendung auf zweiseitige Märkte‘
(Nomos, Baden-Baden 2013), and Haucap and Stühmeier, ‘Competition and antitrust in Internet
markets‘ in Bauer and Latzer (eds), Handbook on the Economics of the Internet (Cheltenham,
Edward Elgar Publishing 2016).
41 Also cf. Filistrucchi, Geradin, van Damme and Affeldt, ‘Market definition in two-sided markets:
Theory and practice’ (2014) 10:2 Journal of Competition Law and Economics 339, and Kehder,
‘Konzepte und Methoden der Marktabgrenzung und ihre Anwendung auf zweiseitige Märkte‘
(Nomos, Baden-Baden 2013) 85-86.
42 Cf. Argentesi and Ivaldi, ‘Market Definition in Printed Media Industry: Theory and Practice’
(2005) CEPR Discussion Paper No. 5096, for an exemplary indication of a bias that may arise
from ignoring two-sidedness when estimating own-price elasticities.
43 Cf. Judgment of the General Court, Topps Europe v Commission, 11 January 2017, T-699/14,
EU:T:2017:2, para 82.
44 Cf. e.g. Davis and Garcés, ‘Quantitative Techniques for Competition and Antitrust Analysis’
(Princeton, Princeton University Press, 2009) 193ff.
45 Also cf. fn. 8.
46 Also cf. Ducci, ‘Out-of-market efficiencies, two-sided platforms, and consumer welfare: a legal
and economic analysis’ (2016) 12:3 Journal of Competition Law and Economics 610.

PART III. MARKET POWER │ 69
Part III. Market power

3. MEASURING MARKET POWER IN MULTI-SIDED MARKETS │ 71
3. Measuring market power in multi-sided markets
By Kate Collyer, Hugh Mullan and Natalie Timan 1
1. Introduction
This short paper was submitted to the Hearing on "Rethinking the Use of Traditional
Antitrust Enforcement Tools in Multi-Sided Markets", that was held by the OECD
Competition Committee on 22nd June 2017 in Paris. The submission focuses on the topic
of “measuring market power in multi-sided markets”. It is intended to provide practical
and pragmatic suggestions for economists in competition authorities. The paper draws
operational conclusions on how to adapt existing enforcement and merger assessment
tools to address some of the challenges posed by multi-sided markets.
The first section of the paper sets out some important features of multi-sided markets,
including indirect network externalities, single-homing and multi-homing, price structure
and tipping. The second section provides some practical steps in assessing market power
in multi-sided markets and the final section sets out some measures of market power, and
how they may need adaptation in multi-sided markets.
2. Features of multi-sided markets
Multi-sided markets are platforms that match two or more groups of customers. Evans
and Schmalensee (2007) define multi-sided platforms as having (a) two or more groups of
customers; (b) who need each other in some way; (c) but who cannot capture the value
from their mutual attraction on their own; and (d) rely on the catalyst of the platform to
facilitate value creating interactions between them.
This section sets out some key features of multi-sided markets that may be important to
an assessment of market power.
Indirect network externalities

As the definition makes clear, indirect network externalities (INE) are an important
feature of multi-sided markets. The benefit one side of the market derives from being on
the platform depends on the number of customers on the other side of the market, and
vice versa. 1 As a result, the demands of each group of customers are interlinked and this
generates feedback loops between them.
INE distinguish multi-sided markets from other markets such as a vertical supply
relationship. These INE go in both directions, but are not necessarily equally strong in
1
Kate Collyer is the Deputy Chief Economic Adviser of the Competition and Markets Authority
(“CMA”) in the United Kingdom. Natalie Timan is Director of Economics at the CMA. Hugh
Mullan is Assistant Director of Economics at the CMA. The views expressed are personal to the
authors and all errors, omissions, and opinions are their own

72 │ 3. MEASURING MARKET POWER IN MULTI-SIDED MARKETS
each direction. When there are strong INE in both directions, the interaction between
these INE on both sides can create a feedback loop that may have second and third and
fourth order effects. For instance, the ultimate effect of a price increase to one side of the
market could be much greater if it led to further feedback loops with participants
increasingly leaving both sides of the market as the market becomes less valuable to each
group of customers. The strength of these feedback loops may constrain the platform’s
market power and should be taken into account in any assessment.
Single-homing and multi-homing

The extent of single-homing and multi-homing by customers on each side of the market is
a key competitive aspect of multi-sided platforms (Rochet and Tirole, 2003). If customers
on one side only join one platform, then customers on the other side can only access those
customers by joining the same platform. Armstrong (2006) shows that this creates
“competitive bottlenecks” - with single-homing customers on one side and multi-homing
customers on the other, the platform competes aggressively for the single-homing
customers and once they are on board it earns profits from customers on the other side
who multi-home. 2 Below, we suggest some practical ways to identify the extent of single
and multi-homing and thereby assess market power.
Price structure
In a multi-sided market, the price structure reflects the interlinked demands of the two
groups of consumers and the need to get both sides on board. This often results in
complex pricing where the price to each group of consumers does not reflect the marginal
cost of supplying them.
To see the importance of price structure in multi-sided markets, consider the example of a
platform supplying businesses on one side of the market and consumers on the other side.
Assume that in this example consumers are more sensitive to price than businesses. In
order to get consumers on board, the platform allows them to use the service without
charge, but the businesses pay (a fixed fee and/or commission) to be present on the
platform. The platform needs to set a fee to businesses that ensures their participation and
takes account of the feedback loops between both sides of the market. Fewer businesses
will choose to use the services of the platform at higher prices and this will reduce the
attractiveness of the platform to consumers on the other side of the market etc etc.3
As this example shows, the platform must be able to use the price structure to internalise
the externalities arising from the INE. Platforms will always be able to control the price
structure in markets where the two sides do not transact. However, in markets where the
sides do transact, one side of the market can reflect some of the increased costs of doing
business on the platform in the price charged for transactions. Businesses on one side of
the market may pass-through the fees they are charged by the platform to the consumers
on the other side of the market when transacting with those consumers through the
platform. This may undermine the platform’s price structure and limit its ability to
internalise the externalities by facilitating value creating transactions between the two
sides. For example, when a business passes through platform commissions to consumers,
it will not consider how this may reduce consumers’ demand for the platform’s services,
which then affects the demand of all business customers for the platform’s services. It is
only the platform which can take these externalities into account in its pricing to both
sides of the market.

Therefore, in addition to the complex pricing that can be a feature of multi-sided markets,
it will also be important to consider the degree of pass-through when considering the
extent to which multi-sidedness affects the behaviour of the platform.
Tipping
Network externalities can lead to markets tipping to one, or a few, providers. The
feedback loops that can arise when there are strong INE mean that multi-sided markets
tend to be relatively concentrated. A multi-sided market may be less likely to tip the more
differentiated the offering from competing platforms and the more that customers on one
or more sides multi-home. 4 Scale economies and having a critical mass of consumers
may also be important in determining the concentration of a market with platforms
because they influence their financial viability.
Once a market tips, the joint behaviour of consumers and businesses may mean that the
market power of the platform becomes well-established. It may take considerable
co-ordination by both consumers and businesses to switch to another platform to restore
competition. Such co-ordination may be unlikely in the absence of major technological
changes in the sector. For these reasons, establishing whether there is a ‘first-mover-
advantage’ may be important in identifying current market power and the potential
longevity and sustainability of this market power.
When the multi-sided nature of the market is relevant to assessing market power
This discussion suggests that any assessment of market power in multi-sided markets
should take account of these features. The standard results from one-sided markets do not
apply directly to multi-sided markets and any assessment of market power needs to take
this into account explicitly (as we show below). Many of our standard tools for assessing
market power are more complex to apply in multi-sided markets and may need to be
adapted. At a minimum, this may involve simply taking into account the impact multi-
sidedness has on the platforms’ business strategy and decisions. In the next section, we
suggest some practical steps when considering measuring market power in multi-sided
markets.
3. Practical steps when considering measuring market power in multi-sided

markets
In this section, we identify some practical approaches which authorities should consider
when measuring market power in multi-sided markets. We discuss these practical
approaches before going on to identify measures of market power.
Understand the nature of competition and identify the market(s) where market
power relevant to the theory of harm is expected to arise
As a first step, an assessment of market power should start from a solid understanding of
the nature of competition in the market under consideration. It should then proceed with
an analytical framework that takes account of any important features arising from the
multi-sidedness of the market.
When thinking about market power and the effect of the conduct, it is important to
identify clearly the nature of competition, including understanding the extent to which
multi-sidedness with multiple consumer groups and interlinked demand affects market

power. This is most likely to be where there are (strong) INEs. For example, market
power on one side of a market may exacerbate market power on the other side, it may
support conduct on another side of the market, or it could be that the market power and
conduct are within the same market, but the conduct also affects another side of the
market. In addition, in multi-sided markets, competitive constraints on market power may
come directly or indirectly from any and all sides of a competing platform. For example,
if a platform tries to engage in exclusion on one side, a rival may be able to respond with
strategies on the other side. This suggests the need to look at all sides of the market when
assessing market power.
The market power we are interested in also depends on the conduct or agreement that we
are interested in. Therefore, measuring market power will be specific to the conduct under
investigation. It is important, at least from an economics perspective, that market power,
is not considered in isolation from the conduct and the theory of harm. 5
Take a sequential approach to measuring market power in multi-sided markets

Given the potential feedback loops between different sides of a market, a purist approach
may suggest measuring market power by assessing all sides of the market simultaneously.
However, this is likely to be a very challenging task and may not be practical, or even
possible. When the multi-sided nature of the market appears important, then a reasonable
and pragmatic approach is to start by using standard tools to assess market power for each
side of the market separately and then factor in the indirect network effects by using a
range of evidence and judgement. As we discuss below, care will be needed when using
and drawing inferences from our standard tools.
4. Measures of market power
In this section, we focus on identifying different measures of market power and explain
how these relate to the conduct considered. These measures of market power are not
exclusive to multi-sided markets. However, we explain how they may need to be adapted
when used in multi-sided markets and we identify some additional challenges that may
arise in this context and where care will need to be taken when interpreting the results of
standard measures. 6
Any assessment of market power should be based on a thorough assessment of the
competitive constraints and in multi-sided markets it will often be necessary to use
multiple sources of evidence and always consider the linked nature of demand.
Market shares and concentration

Shares of supply can be a useful indicator of concentration and therefore market power,
particularly for homogenous products or services. Their usefulness depends on how well
the market is defined in the first place. There are challenges to using market shares as an
indicator of market power in multi-sided markets, particularly for platforms.
The first challenge is how to measure market share. It is not always clear how shares
should be computed to take account of the multi-sidedness of the market. The pragmatic
solution would be to follow the sequential approach outlined above and to measure
market shares on all sides of the platform. Market shares can then be evaluated within the
overall analytical framework that takes account of the nature of the linked demands and
the feedback loops. This flexible approach allows for more weight to be attached to high

market shares on one side of the market if the evidence suggests, for example, that that
side is prone to single-homing.
As with all markets, it will be necessary to think through which shares one wishes to
measure. For example, it will not be possible to compute value shares on both sides if one
side does not pay for using the platform. It may then be necessary to measure the number
or value of transactions to calculate market shares. The standard problem of interpretation
also arises with, for example, concerns regarding the relevance of market shares as
measures of market power in markets where services/products are differentiated.
In multi-sided markets, it may be challenging to distinguish between customers and
competitors because customers on one side of the market may also be competitors to the
platform. For example, hotels that list on an online travel agent platform might also
compete directly for bookings. To take another example, third party sellers are customers
on Amazon Marketplace and might also compete with Marketplace to attract direct sales.
Care will be needed to ensure that customers and competitors are correctly identified and
captured in measures of market shares.
Authorities typically aim to identify longer term measures of market power (e.g.
sustained high levels of market share) rather than measures which take a snapshot of a
market in flux or out of equilibrium. However, a multi-sided market with network
externalities may be prone to tipping and authorities may wish to intervene earlier. In that
context, care will be needed to identify whether indications of market power at a
relatively early stage in the development of the market may lead to long term market
power.
The challenges outlined above indicate that care needs to be taken when interpreting what
market shares and, more generally, concentration, indicates about market power in multi-
sided markets.
Margins, profitability and pricing

As with market shares, measures of margins and profitability can be used to assess market
power. Alongside the usual pitfalls of using such measures, multi-sided markets present
additional problems given the existence of feedback loops and the complexity of pricing
structures. Theoretical models have been developed that explicitly take account of the
linked nature of demand in multi-sided markets and could provide a basis for measuring
margins or profits. However, these models are complex and may not be practical to
implement.
Following the sequential approach described above, it may be more pragmatic to measure
margins or profits to each group of consumers and then take account of the strength of
feedback loops and the implications for inferences regarding market power. This would
need to be done carefully and recognising that examining margins on one side of the
market alone could give false indications of market power.
It may also be informative to consider changes in margins or profits over time. For
example, it may be possible to examine whether commission levels have increased with
concentration in the market, while service or quality levels, or marketing to the other side of
the market, has not increased concurrently. This might provide an indication of market
power.

Single-homing vs multi-homing
The extent to which customers on one side of the market single- or multi-home affects the
single-or multi-homing choice of customers on the other side of the market. Examining
the extent of single or multi homing on each side can provide an indication of likely
market power on each side.
Businesses will benefit from listing on more than one platform if they can play-off the
platforms against each other or if listing on more than one platform expands the number
of consumers in aggregate. For example, a platform may be good at bringing consumers
to the market who would otherwise not participate. If, on the other hand some consumers
single home to platform A and others single home to platform B, then businesses will find
it necessary to use both platforms to reach both sets of consumers). However, single-
homing by different groups of consumers, and multi-homing by none, can lead to market
power for each platform. 7
In markets where INEs are strong it will be important to measure the extent of single or
multi-homing on each side of the market before considering any feedback loops. In
practice, this can be done by gathering information on the following questions:
Competition in the paid side of the market

• What proportion of customers on the free side of the market single-home?
This will partially determine the extent of multi-homing on the paid-for-side. If
there is single-homing by at least some consumers, then businesses have a strong
incentive to list on that platform. Therefore, single-homing may give rise to the
platform having market power.
• What proportion of customers on the paid-for-side of the market single-
home? If all businesses single-home on one platform, it may be an indication of
market power. However, multi-homing by the paid-for-side of the market does
not imply the absence of market power if consumers single-home. This is because
businesses may need to list on more than one platform to attract single-homing
consumers.
• How important is the platform for attracting customers to the paid side? If a
business on one side of the platform could attract consumers directly, without
listing on the platform, then the platform is less likely to have market power.
Competition in the free side of market

• How important is the platform for a consumer when choosing the product it
wishes to purchase and the supplier it uses? A platform is less likely to have
market power if consumers can easily find and purchase their preferred product
through other channels.
• How loyal are consumers to one platform?
• How easy is it for consumers to search across competing platforms?
Information on customer behaviour and the extent of single or multi-homing can be
obtained from several sources.
• Membership data from market participants can be used to measure the extent of
overlap of consumers, or businesses, between the different platforms.
• Transaction data from market participation can be used to measure the extent of
overlap and the volume of transactions involved.

• A survey may provide a better understanding of customer behaviour on all sides

of the market and may provide insights into how they use the platforms to search
for products and therefore the true extent of multi-homing.
• Web server data might be used to analyse user behaviour within a specific domain
or how consumers search across platforms. This could help the agency to
understand: 8 how many platforms a consumer visits and how often; whether the
consumer considers direct sales from businesses, and their websites, and in what
order this search occurs; how much time the consumer spends on the search and
whether the level of engagement indicates more or less market power.
• Search engine optimisation (SEO). For online platforms, a good understanding of
the platforms’ SEO strategy may help assess market power. This might include
the use of keywords and search terms and how they affect activity on the
platform. In theory, the greater the overlap in search terms, the more likely the
platforms are to target the same customers, and therefore the more likely they are
to be competing closely.
Conduct
Sometimes the ability to engage in the conduct may be seen as an indicator of market
power, particularly for conduct that would be unachievable or unprofitable in the absence
of market power. 9
Clearly an important factor to consider is how the conduct may lead a market to tip when
a market is already prone to tipping due to the INE.
Barriers to entry and expansion, including switching costs as a source of

market power
As a final comment on measures of market power, we note that any assessment of market
power should include an analysis of barriers to entry and expansion. A firm is unlikely to
have market power in the absence of material/substantial barriers to entry, and barriers to
large-scale expansion by fringe competitors.
The relevant types and extent of barriers to entry may depend on the context, but these are
fairly well established. For example, one may consider the costs of entry and the extent to
which these costs are likely to be sunk following entry. One may also consider how the
costs of entry compare to the likely benefits of entry and how risky profitable entry would
be. Profitable entry may be risky due to exogenous demand and supply shocks and/or due
to strategic responses to entry by incumbents. None of these factors are unusual to multi-
sided markets, but are likely to be relevant to them.
A consideration in multi-sided markets is the need for platforms to establish and market
themselves to all sides of the market. The importance of this will depend on the strength
of INE on the different sides of the market. The platform will need to attract all groups of
customers and entry costs may differ for each side of the market. For example, it may be
relatively easy to get businesses to join a new platform when they only pay usage fees
and so are willing to multi-home. However, the platform may need to make significant
sunk investments in advertising and content i to attract consumers to the platform.
Switching costs may also be important in multi-sided markets. Switching costs can create
barriers to entry and expansion and, if there is a first-mover-advantage, can establish and
strengthen a position of market power.

Switching costs may arise between platforms, or between platforms and direct sales, due
to customer habits and convenience. For example, cookies used by the platform may
mean that it is likely to show a consumer a selection closer to the consumer’s preferences.
The platform may hold the consumer’s payment card details, meaning that these do not
need to be re-entered every time a purchase is made. The platform has the contact details
of the consumer and knows other personal information, so that the platform can contact
the consumer with targeted promotions. Also, the nature of platforms is to reduce search
costs and aid comparability. Therefore, consumers may be expected to prefer this to direct
search across businesses’ own websites.
Technological developments may weaken switching costs as they may lead to periods of
intense innovation and businesses responding to technological changes, which can be
destabilising to established market power. On the other hand, technological developments
may also enhance market power. For example, consumers may be less willing to shop
around through organic browser searches when they have a convenient app on their
phone. Moreover, consumers may not be willing to have numerous apps on their phones
supporting similar services.
5. Assessing the strength and impact of indirect network externalities and feedback
loops
In this final section, we provide practical suggestions for assessing the strength and
impact of indirect network externalities and feedback loops. We have proposed a
sequential approach, looking first at the market power on each side of the market
separately, and second looking at constraints from the other side via the feedback loops.
This second step requires us to assess the strength of feedback loops to examine whether
competition from one side of the market constrains the platform in its price setting to the
other side of the market. This will help establish whether market power on one side of the
market exacerbates market power on another side or whether competition from one side
might constrain the other.
This second step is important because in the presence of strong INE simple one-sided
measures of market power potentially underestimate the market power of the platform.
For example, if the conduct in question undermined the ability of other platforms to
compete effectively, then the presence of strong INE could lead to rapid concentration of
the market and the exclusion of rivals. In this example, if the conduct leads to single-
homing customers on one side of the market switching, the INE may simultaneously act
to strengthen one competitor rapidly and weaken another rapidly. This could be the case
even though static market shares, or other measures, may not indicate a position of
significant market power or dominance.
It is also important to recognise that the potential benefits that a platform may gain from
additional customers on one (or more) side(s) of the market may not always be large. The
incremental value of gaining an additional customer is likely to vary depending on the
number of customers already on the platform. Where a platform already has many
potential members of the market on board, adding one additional business will not
increase the value of the platform to the consumer as much as when the platform had
fewer businesses on board. A platform might therefore put less effort into recruiting
customers once it is more mature. This implies that the pricing structure on the platform
is likely to evolve to reflect the benefit to the platform of additional customers and how
this may change with the total number of customers on the platform. 10

There are two key elements of an assessment of the strength and impact of INE and
feedback loops. The first is the elasticity of demand (on all sides), which provides an
indication of the sensitivity of that group of customers to a change in the relative price.
The stronger the reaction to a change in price, the greater the impact of the feedback loop.
The second element is the responsiveness of demand (on all sides) to participation rates
on the other side(s), which provides an indication of how a response from one side of the
market to a change in price will affect demand on the other side of the market.
In some circumstances, it may be possible to assess the strength of the INE by simply
looking at the rate of growth of the platform and considering how growth in one side of
the market appears to give rise to growth in the other side of the market.
In practice, it may be difficult to measure these elements directly. However, the following
are three potential sources of evidence that may provide information on the strength and
impact of the INE and feedback loops.
• Customer data. If it is possible to collect transaction data for market participants,
it may be possible to use econometric techniques to examine past customer
responses to changes in, for example, platform prices that reveal their preferences.
This data would allow for the direct measurement of both the elasticity of demand
and the responsiveness of demand to participation rates on the other sides. There
are a number challenges with using such evidence, one being that it may be hard
to ascertain the extent to which customers respond by choosing an off-platform
“outside option”.
• Econometric techniques. A combination of evidence on revealed and stated
preference could be used to model choice or estimate demand econometrically. It
may also be possible to measure INE directly using econometric techniques.11 At
present, the theoretical models we are aware of appear to make several
simplifying assumptions and we do not know of any attempts by any competition
authorities to do this. 12
• Survey evidence. Surveys provide a promising source of information on the
strength and impact of feedback loops. Although surveys suffer from the
drawback of using stated preferences, they may have the benefit of not only
providing useful insights into both elasticity of demand and responsiveness of
demand to participation rates, they may also allow for the assessment of
preferences for off-platform options. A survey of businesses, or customers on the
paid side of the market, would allow an authority to gather information on a range
of questions, including: the extent to which the businesses would pass through
increases in the cost of transacting on the platform in the form of higher prices to
consumers on the platform; the value to businesses of consumer participation and
willingness to pay for different rates of participation; the availability of
alternatives and the existence of any switching costs. This could be complemented
with a survey of customers on the other side(s) of the market (i.e. consumers),
which could include questions on how they would react to changes in the relative
price of transactions on the platform, the value to these consumers of business
participation and how different business participation rates would affect their
willingness to use the platform.
These sources of information are unlikely to provide all the evidence required to assess
the strength and impact of INE and feedback loops. The authority will need to make an
assessment in the round and using multiple sources of evidence, including internal
business documents.

6. Conclusion
Where indirect network externalities are strong, the multi-sided nature of the market will
be relevant to the conduct under investigation. The pragmatic approach of assessing
market power in each side of the market and then taking into account feedback loops will
capture the multi-sided nature of the market and its relevance to the conduct under
investigation, provided that it is possible to assess accurately the feedback loops.
We have suggested several practical ways of measuring market power in the different
sides of the market, taking account of the added complexity and potential biases that arise
in using these measures in multi-sided markets. We have also suggested ways of directly
measuring the feedback loops. However, it will not always be possible to measure the
feedback loops directly. Where this is not possible, thinking through how these loops are
likely to work in practice will provide a good qualitative way of capturing the impact
indirect network effects will have on market power.

Annex. Examples of cases assessing market power in multi-

sided markets
This annex provides a short summary of some cases which featured multi-sided markets
and were considered by the CMA (or OFT). They illustrate some of the points which
have been made in the main body of the paper and show how the have been applied in
practice.
Commercial radio station mergers
With commercial radio stations, advertisers pay radio stations for listeners to hear their
commercials and ultimately to increase sales, and listeners purchase radio broadcasting
content by listening to the commercials.
In Global/GMG the merging parties had argued that commercial radio competes with the
BBC for radio audiences and that this has an indirect impact on advertising revenue of
commercial stations given the two-sided nature of the market. 13 This provides an example
of how competition for one side of the market, listeners, may provide a constraint that
protects the other side of the market, even though this competitor does not compete for
the other side of the market. Here, commercial radio stations may be constrained from
increasing the volume of advertising that they allow on their radio stations or degrading
the quality of their programming, because listeners may then switch to the BBC.
Although the OFT considered it credible that there may be some indirect form of
constraint, there was no merger-specific evidence on the extent of this constraint. 14 In
addition, despite recognising the two-sided nature of the market, the OFT chose to focus
primarily on the overlap in radio advertising rather than the overlap between consumers
(listeners) of radio stations, or any adverse effects which may be faced by consumers due
to the merger.
In Global/GCap, the OFT similarly focused its analysis on whether the merger would lead
to advertisers paying more to reach listeners and/or advertisers would receive reduced
value for the money they spend on adverts. 15 Nevertheless, the assessment also
considered how the merger may have negative or positive effects on listeners and how
this may depend on the two-sided nature of the market.
The OFT identified that a loss of competition due to the merger could lead to lower-
quality programming or innovation levels, for example, less investment in paying for top
DJs, presenters, research into play-lists and listeners tastes, and so forth. The OFT noted
that, due to the INE, an adverse effect on listeners, for example due to a reduction in the
quality of programming, would lead to listeners placing a lower value on radio and, as
listener numbers fell, this would have a negative effect on the value which advertisers
place on radio. In this way, the effects are mutually reinforcing, discouraging the merger
parties from deteriorating their programming.

The OFT also considered listeners being “obliged to pay more for the broadcasting
content they seek by being obliged to listen to incrementally more advertising - which can
be considered an adverse effect based on the reasonable assumption that listeners do not
listen to the radio primarily to hear adverts”. The merging parties submitted that they
could broadcast no more than 13 minutes of adverts per hour because this is the tolerance
band of listeners – too many listeners switch off if the proportion of adverts increases
beyond this to make extra advertising profitable. 16
The OFT considered that it may be necessary to balance harm on one side of the market
against benefits on the other side of the market. That is, an increase in prices that harms
the advertiser side of the market may actually benefit the listener side of the market if it
restricts advertising output (total airtime), to the extent that listeners do not listen to the
radio primarily to hear adverts. 17
The assessment in Global GCap also looked at how the merger may lead to efficiencies
and how those efficiencies could be strengthened by to the two-sided nature of the
market. The OFT considered it credible that the merging parties would seek to reposition
their radio stations to make them more differentiated post-merger and this would benefit
listeners and advertisers. 18 The OFT considered that brand repositioning could potentially
improve programming, leading to more listeners tuning-in and as a result advertisers
would be able to reach more listeners, making radio is more valuable to them. 19
Any benefit that listeners gain from re-positioning would also need to be balanced against
any direct price effect to advertisers from the merger. 20 The OFT took some
encouragement from the theory around positive brand repositioning effects in radio
broadcasting having been validated in empirical economic literature.21 Nevertheless, even
in the economics literature the price effects from brand repositioning can be ambiguous.22
In terms of measuring the potential demand-side efficiencies from brand-repositioning,
the OFT considered evidence from the merging parties showing: (i) instances of brand-
positioning which occurred with previous acquisitions, as demonstrated through case
studies; and (ii) the merging parties’ plans to reposition their brands post-merger; and (iii)
evidence on the value that customers place on repositioning. Advertisers were also
supportive in seeing brand repositioning as a favourable development.
Although the discussion above relates to an assessment of efficiencies, it is important to
realise that these arise out of the INE in multi-sided markets and that the same
considerations and measurement techniques may be applicable to measuring market
power. For example, one may use previous instances of entry, expansion or increases in
concentration to test the strength of INE or to assess market power more directly.
Similarly, it is common to look at parties’ internal documents and to understand their
post-merger plans when assessing INE and market power.
Epyx – a dominance assessment
The Epyx case provides an example of how a strong preference for single-homing on one
side of the market, as well as the conduct of the firm, has been used in the assessment of
market power.
The CMA’s dominance case related to Epyx’s vehicle service, maintenance and repair
(SMR) platform. This is a commercially available online platform enabling companies
requiring the service, maintenance and repair of corporate vehicle fleets to procure these
services electronically. It is a two-sided service, designed to facilitate the interaction of

one side of the service (buyers, also referred to as demand-side customers) with the other
side (suppliers, also referred to as supply-side customers). The service offers a one-stop
shop for a wide range of functionality covering a wide range of transaction types.
The CMA found that most demand-side customers would prefer to use one SMR platform
only at a given time when processing SMR transactions because multi-homing brings
increased complexity and operational costs of running multiple systems in parallel. 23 The
CMA also found that the SMR processing choices are demand led and that the suppliers
multi-home in response to the single-homing by buyers. Buyers prefer to single-home, so
suppliers provide services on the platforms that buyers use. 24
The CMA also identified how the network effects in this market may lead to barriers to
entry. Demand-side customers do not see much value in joining an alternative platform
unless enough suppliers are subscribed to it, while supply-side customers will only be
inclined to use platforms that have demand-side customers. Therefore, the costs and lead-
times to build a network on both sides of the market were identified as barriers to entry. 25
Challenges in this market were seen to be the need for any new platform to be tested with
customers and the need for the co-operation of Epyx in preparing for and ultimately
affecting a switch during any transitional period. 26
The challenges faced by any potential entrant due to these barriers to entry were made
particularly difficult by the conduct of Epyx, which the CMA considered to be abusive.
This illustrates how the conduct itself may be relevant to the assessment of dominance.
Epyx’s contracts on the demand-side required customers to make all transactions through
Epyx’s platform. They also required customers to pay a minimum annual fee, even if the
volume-related variable fees fell below this fixed fee. Many of the contracts also required
demand-side customers not to ‘develop, use, market or support the sale’ of any alternative
systems. 27 These provisions prevented demand-side customers from developing their own
alternative systems or sponsoring third parties’ alternative systems. 28
Notes
1
For example, the more businesses that join a platform, then the more consumers find that platform
to be attractive; and the more consumers join a platform, then the more businesses find that
platform to be attractive. In addition, the platform may allow advertisers to promote themselves to
consumers (or businesses, or both), which may be a third side of the market.
2
Firms compete aggressively on the side that uses a single network in order to charge monopoly
prices on the other side that is trying to reach them. Armstrong, Mark. 2006. “Competition in
Two-Sided Markets” The RAND Journal of Economics, 37(3): 668-91. As a result, competition
between platforms can have large price effects on the side of the market that uses a single
platform and little or no effect on the side that uses multiple platforms. Rysman, Marc. 2009. “The
Economics of Two-Sided Markets” Journal of Economic Perspectives – Volume 23, Number 3:
125-143.
3
The platform may operate at a loss-making level for some time while it seeks to build up
participation on both sides of the market.
4
However, as already noted, single-homing by customers on one side of the market but across more
than one platform will tend to lead customers on the other side of the market to multi-home. If
customers on one side increasingly single-home on very few platforms, then this would lead to the

market tipping to these platforms despite customers on the other side of the market multi-homing
across these few platforms. Therefore, it will tend to be the increasing extent of single-homing by
the side of the market with most price elastic demand for the platform’s services which will drive
tipping.
5
Some questions that one might ask include: (i) How does any potential market power arise in a
market that has indirect network effects and aspects of multi-sidedness? (ii) How is the behaviour
under investigation related to the market power in the relevant market? (iii) Are the network effects
and multi-sided nature of the market important to the market power? (iv) Are the network effects and
multi-sided nature of the market important to the behaviour being investigated? (v) Is the behaviour
being investigated important for the network effects in the market (e.g. foreclosure which may lead
to the market tipping permanently or preventing some potentially important innovation).
6
As an aside we note that the cellophane fallacy presents a particular challenge when measuring
market power in multi-sided markets, outside of the context of mergers. This standard problem
may arise in any market because, in the presence of market power, prevailing prices would not
equate to competitive prices and the application of the hypothetical monopolist test to prevailing
prices is likely to lead to the relevant market being defined too broadly (i.e. including products
which are not close substitutes at competitive prices). The extent of this problem is likely to
depend on the conduct being considered. In some contexts it may be possible to identify market
power directly without initially defining a market (e.g. by looking at the relationship between
price and concentration in comparable geographical markets). The difficulties arising with the
cellophane fallacy are not particular to multi-sided markets, but may be more challenging because,
as discussed earlier, the nature of these markets means that price will often have little relationship
with measures of cost on either side of the market. Therefore, assessing a competitive price which
is related to a measure of cost is likely to be more challenging. Nonetheless, while it is important
to recognise these difficulties in assessing conduct, the measures of market power identified below
should still be useful.
7
There is an open question as to whether it makes sense to find all platforms as having market
power. Furthermore, do they have market power in the supply of services to businesses (on one
side of that platform) due to the single-homing of the consumers (on the other side of that
particular platform); or do they have market power in the supply of services to the single-homing
consumers? Finally, potential market power due to consumers single-homing on platforms may
not arise if some/many consumers use tools to search across platforms – effectively multi-homing
without necessarily visiting each platform. For example, metasearch sites used in the online travel
industry would appear to support this form of multi-homing (although they appear to account for a
rather small proportion of bookings).
8
We would expect platforms to collect an array of data internally to monitor how it is performing
against internal targets and against rivals. Therefore, internal documents and management
information collected during the normal course of business are likely to provide useful insights.
9
For example, the use of wide MFNs by some platforms might provide some indication of market
power. On the other hand, it may be that the conduct itself impacts upon other measures of market
power. For example, a wide MFN reduces the incentive of businesses to pass-through a
commission increase into their prices on that platform and, to the extent that it is passed though, it
will be matched on other platforms. This means that the initial ‘feedback loop’, which one might
consider in assessing market power, is no longer operational due to the wide MFN.
10
In other words, at the margin, the strength of the INE is unlikely to remain constant.
11
Through simultaneous demand estimation it may be possible to model demand on all sides of the
market and back out the cross elasticities in order to measure the INEs.

12
See, for example, Song, M (2015) “Estimating platform market power in two-sided markets with
an application to magazine advertising.” Working Paper.
13
The BBC is a public service broadcaster which has numerous radio stations but no advertising on
these stations.
14
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/77575/Global_G
MG_Radio_Repor_PRINT_t.pdf
15
Completed acquisition by Global Radio UK Limited of GCap Media plc ME/3638/08, 27 August
2008. https://assets.publishing.service.gov.uk/media/555de372ed915d7ae5000094
/Global_GCap.pdf
16
In other words, the assessment considered how negative INE, arising due to listeners disliking
advertising, may protect listeners from an increase in the volume of advertising.
17
In contrast to the mutually reinforcing competitive effects described before, the OFT noted that
these competitive effects, which were initiated on the other side (the advertiser’s side) of the
market were inversely related. Para 31
18
A further demand-side merger efficiency in a two-sided market such as radio can occur as a result
of post-merger product or brand repositioning. The basic proposition is that by changing radio
stations format and/or programming post-merger in a way that benefits listeners (that is, by greater
demographic specialisation by individual radio stations), combined radio stations can achieve a
larger and more focussed total audience. The resulting airtime is therefore more valuable to
advertisers seeking to reach a large, focussed demographic.
19
Para 30.
20
The OFT noted the challenges in estimating the different effects: “it is unclear to the OFT how
much—if at all—listeners value each incremental reduction in advertising below the 13 minute
per-hour threshold, nor does the OFT know the curvature of the relationship between price and
total airtime demanded by advertisers for each relevant station affected by the merger” (para 32).
21
See Steven Berry and Joel Waldfogel 'Do Mergers Increase Product Variety? Evidence from
Radio Broadcasting', Quarterly Journal of Economics, August 2001, pages 1009— 1025, who
show that the effect of radio mergers after the US Telecommunications Act of 1996—which
relaxed radio ownership restrictions to differing extents in different-sized markets, effectively
running experiments on consolidation in markets of different sizes—was to increase the amount of
programming variety relative to the number of stations. Other academic work suggests the same
changes also improved radio stations' performance in the market, implying that format changes by
smaller stations may counter the potential exercise of market power by large radio groups that
acquire a substantial share of a particular audience demographic through merger. See Charles
Romeo and Andrew Dick 'The Effect of Format Changes and Ownership Consolidation on Radio
Station Outcomes', Review of Industrial Organisation, December 2005, pages 351—386.
22
See Amit Gandhi, Luke Froeb, Steven Tschantz and Gregory Werden 'Post-Merger Product
Repositioning', Journal of Industrial Economics, March 2008, pages 49—67, who find that the
merged firm moves its product varieties away from each other to reduce cannibalisation and its
competitors move their product varieties between those of the merged firm. Post-merger
repositioning therefore benefits customers by increasing product variety. However, they also find
that repositioning affects post-merger prices in two countervailing ways: there is upward pressure
on all prices as product varieties spread out but the merged firm's incentives to raise price are
reduced as its product varieties move away from each other (as there is less competition between
them to internalise).
23
Para 2.23

24
Para 2.24
25
Para 2.30
26
Para 2.31
27
Paras 3.11-3.12
28
Para 3.14

4. Measuring market power in multi-sided markets
By Kurt R. Brekke 1
1. Introduction
Multi-sided markets are markets in which a firm serves two or more distinct groups of
consumers. Classical examples include markets for newspapers (serving readers and
advertisers), credit cards (serving shoppers and merchants), and taxis (serving travellers
and drivers). This kind of markets has been around for decades. However, the importance
of multi-sided markets in the economy has increased tremendously, mainly due to
digitalisation and the rapid growth of online markets. 1 While many of these markets are
offering entirely new products to consumers, they also transform traditional one-sided
markets into multi-sided markets due to new business models often based on advertising
as a key source of income.
A key feature of multi-sided markets is the existence of network externalities between the
different sides (consumer groups) in the market, which are by definition not present in
one-sided markets. Network externalities arise when the utility (or profit) obtained by a
consumer (or firm) of one type depends on the number of consumers (or firms) of the
other types in the market and the different consumer groups cannot internalise these
externalities. While the strength of the externality depends on the size of the network, the
sign of the externality can be positive or negative. In the classical newspaper example, it
is quite clear that readers are imposing a positive externality on advertisers, as they are
also potential buyers of the advertised products. This implies that newspapers with large
circulation are likely to attract more advertising revenues. However, the externality on
readers of advertising can be positive, negative or even zero, depending on how
advertising is affecting readers’ utility. 2
The presence of network externalities between the different consumer groups in multi-
sided markets changes the strategic nature of the market game. This has been well-
documented by the large economic literature that has emerged on multi-sided markets. 3 A
main reason is that network externalities affect demand from the different consumer
groups, which in turn influence the firms’ strategic behavior, including pricing decisions.
In the newspaper market, a higher subscription fee will increase the profit margin on
readership but at the same time reduce advertising revenues due to lower circulation.
Thus, the positive network externality from readers to advertisers constrains newspapers
in setting high prices to readers. Indeed, in many online markets, firms are charging zero
user fees to maximise network effects and thus advertising revenues.
1
Chief Economist in the Norwegian Competition Authority (NCA) and Professor at the Norwegian School
of Economics (NHH).

The growing importance of multi-sided markets in the economy poses a key challenge for
competition authorities. A main reason for this is the lack of appropriate tools for
assessing possible anti-competitive effects of firm behavior in such markets. This has
been clearly demonstrated in recent antitrust cases, including the EU cases against
Google, Microsoft and Facebook. 4 While there have been major developments in antitrust
analysis for traditional one-sided markets, such as price pressure tests in merger cases,
these tools cannot directly be applied to multi-sided markets without any adjustments.
Indeed, the nature and strength of the network externalities in multi-sided markets are
likely to determine the anti-competitive effects of firm behavior in such markets.
Applying tools developed for one-sided markets may therefore lead competition
authorities to make wrong decision, such as stopping beneficial mergers (type 1 error) or
clearing harmful mergers (type 2 error).
The purpose of this paper is to explore recent developments in the economic literature on market
power in multi-sided markets, focusing on practical methods and tools that can be applied by
competition agencies, especially in their assessment of horizontal mergers in such markets. The
paper is organised as follows. Section 2 briefly describes the traditional measures of market
power in one-sided markets and the new developments related to price pressure tests. Section 3
reviews the recent developments in the literature on merger assessment tools for multi-sided
markets, whereas Section 4 discusses how these tools can be implemented in practice by
competition authorities. Section 5 concludes the paper with some policy recommendations.
2. Market power in one-sided markets
Traditionally, competition authorities have measured market power by using

concentration indices. The main measure in merger cases has been the post-merger
Herfindahl-Hirschman-Index (HHI) and the merger-related change in the HHI. The HHI
is defined as the sum of each firm’s market share
𝐻𝐻𝐻𝐻𝐻𝐻 = ∑𝑛𝑛𝑖𝑖=1 𝑠𝑠𝑖𝑖2 ,
where si is firm i’s market share and n is the total number of firms in the market where the
merger takes place. The higher the HHI, the more concentrated is the market, with
monopoly yielding a maximum value of 10,000 (i.e. one firm having a market share of
100 percent). Since the post-merger HHI is not observed by competition authorities, this
is usually computed by imputing the pre-merger market shares (i.e. assuming each firm’s
market share remains constant after the merger). 5 This implies that the merger-related
change in the HHI, assuming firm1 and 2 merge, is simply given by
∆𝐻𝐻𝐻𝐻𝐻𝐻 = 2𝑠𝑠1 𝑠𝑠2
yielding the following post-merger HHI
𝑛𝑛
𝐻𝐻𝐻𝐻𝐻𝐻 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 = � 𝑠𝑠𝑖𝑖2 + 2𝑠𝑠1 𝑠𝑠2

𝑖𝑖=1
where si is firm i’s (observed) pre-merger market share.
According to the U.S. merger guidelines (2010), markets in which the HHI is between
1,500 and 2,500 points are considered to be moderately concentrated, and markets in
which the HHI is in excess of 2,500 points are considered to be highly concentrated. 6
Mergers resulting in highly concentrated markets that involve an increase in the HHI of
between 100 points and 200 points potentially raise significant competitive concerns and

often warrant scrutiny. Mergers resulting in highly concentrated markets that involve an
increase in the HHI of more than 200 points are presumed to be likely to enhance market
power and will usually be investigated by the competition agencies.
However, the use of HHI as a measure of market power has been heavily criticised in
recent years. First, the foundation of HHI in economic theory is based on Cournot
competition with homogeneous products. In such markets firms sell identical products
and compete in quantities, and the price is established by an "auctioneer" that clears
demand and supply. If these are key characteristics of the industry where the merger takes
place, then the HHI is likely to be an appropriate tool for competition authorities.
However, in most markets firms compete in prices and sell differentiated products, which
implies that the HHI can be misleading as an indicator of possible anti-competitive effects
of the merger.
Second, the use of HHI requires a definition of the relevant market, which is usually done
using a so-called "Small but Significant and Non-transitory Increase in Price" (SSNIP) test.
Following this practice is problematic in differentiated product markets, as any HHI-based
analysis neglects information on the substitutability between products, which is decisive for
measuring market power in such markets. While substitutability between products is a
matter of degree, market definition is conceptually different because it involves a zero/one
decision of whether or not to include a given product in the relevant market.
Third, the HHI, as a measure of market power, is difficult to relate to possible efficiency
gains in, say, a merger case. The reason is simply that HHI is a non-monetary measure,
whereas efficiency gains usually are expressed in monetary terms. While it is possible to
translate changes in HHI into price effects, this requires information about price
elasticities, which usually are difficult to obtain for competition agencies. Moreover, even
if it is possible to translate the HHI in monetary terms, the two above-mentioned critiques
still apply, implying that the comparison with efficiency gains is misleading, as the HHI
does not provide a reliable measure of anti-competitive effects, except for markets
characterised by Cournot competition with homogenous products.
As a response, pricing pressure indices have been proposed as alternative measure for
competition authorities when assessing horizontal mergers involving differentiated
products. The framework is based on Bertrand competition with firms selling
differentiated products. The price pressure indices characterise the unilateral price effects
of a horizontal merger by calculating the post-merger effects of marginal price increases
above the pre-merger level. The idea is that, prior to the merger, if one of the merging
firms raises its price by a small amount above the observed equilibrium price, its profits
remain unchanged. Post-merger, if the merged firm increases the price of one of its
products, some of the lost sales will be recaptured by the second product (which used to
be a competing product). Therefore, this price increase is now profitable and thus likely
to occur in the absence of efficiency gains.
The concept of Upward Pricing Pressure (UPP), recently proposed by Farrell and Shapiro
(2010), is based on the idea that a merger changes the firms’ pricing incentives in two ways:
(i) it creates upward pressure on prices due to the loss of competition between the merging
parties’ products and (ii) it leads to downward pressure on prices caused by merger-related
efficiencies (marginal cost decreases). The difference between these two effects is the UPP.
The UPP measure is derived by evaluating the merging firms’ post-merger first-order
conditions at the optimal pre-merger prices, granting the merging firms an efficiency credit.
Considering a merger between firm 1 and 2 selling differentiated products 1 and 2,
respectively, Farrell and Shapiro (2010) define the UPP on product 1 as follows: 7

UPP1 = (P2 − C2) D12 − E1C1 ≥ 0

where D12 is the diversion ratio from product 1 to product 2, 8 P2 is the price of product 2,
C1 and C2 are the marginal costs of product 1 and 2, respectively, and E1 captures possible
merger-related cost synergies in producing product 1, measured in relative terms
(percentage). 9 Hence, given that the price of product 2 remains the same, the merging
firm would like to increase the price of product 1 after the merger as long as UPP1 ≥ 0.
The condition is a trade-off between downward price pressure from a lower marginal cost
E1C1, and the upward pricing pressure from the value of diverted sales (P2 − C2) D12. 10
The upward pricing pressure is explained in U.S. Horizontal Merger Guidelines (2010) as
follows:
‘Adverse unilateral price effects can arise when the merger gives the merged
entity an incentive to raise the price of a product previously sold by one merging
firm and thereby divert sales to products previously sold by the other merging
firm, boosting the profits on the latter products. Taking as given other prices and
product offerings, that boost to profits is equal to the value to the merged firm of
the sales diverted to those products. The value of sales diverted to a product is
equal to the number of units diverted to that product multiplied by the margin
between price and incremental cost on that product.’ (p. 21)
In their comment on the U.S. merger guidelines (2010), Salop and Moresi (2009) propose
to use the Gross Upward Pricing Pressure Index (GUPPI) to measure the upward pressure
on post-merger prices. Differently from UPP, GUPPI does not grant an efficiency credit
and then evaluates whether UPP is positive. Rather, it expresses UPP in terms of
percentage margins. The GUPPI can be written as follows
𝑃𝑃2 −𝐶𝐶2 𝑃𝑃2
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺1 = 𝐷𝐷12
𝑃𝑃2 𝑃𝑃1
Since GUPPI only captures the upward price pressure due to internalisation of
competition between the merging parties’ products post-merger, it will always be positive
if the merging parties’ products are substitutes. Hence, if GUPPI is to be used as a
horizontal merger screening device, some threshold GUPPI level needs to be specified
below which the merger is considered not to give rise to substantial unilateral effects.
A novelty of the UPP and GUPPI measures is that no assumptions are needed on the
demand structure or pass-through rates. The reason is that these measures do not calculate
the magnitude of the price change but only its direction (i.e. whether a price increase
following the merger is likely or not). This implies that the measures can, in principle, be
applied to any (one-sided) market, independent of specific market characteristics.
However, it is important to be aware that the UPP and GUPPI are not direct measures of
the expected price effects of the merger. Moreover, the UPP and GUPPI formulas are
derived assuming prices of all other products are constant, including products of the
merging parties but also rival firms. This is a main reason why the UPP and GUPPI
measures are to be interpreted as indicative and not predicted price effects of the merger.
Hausmann et al. (2011) advances the price pressure tests by allowing for feed-back
effects between the merging firms’ products. More precisely, considering a merger between
firm 1 and 2 selling differentiated products 1 and 2, respectively, they allow for prices of
both products to change following the merger. However, to derive the price pressure
formulas, they need to assume linear demand functions, which implies that the diversion
ratios are constant and do not vary with price levels. Despite this caveat, their price

pressure test can be useful to competition agencies, especially for mergers where linear
demand can be a reasonable assumption. One can also argue that linear demand implies a
conservative measure as the pass-through rate to consumers is 50% of the price change.
In cases where data allow for demand estimation, competition agencies are in a position
to conduct merger simulations that also account for price responses by outsiders. As
prices usually are strategic complements, accounting for such price responses reinforce
any price effect of horizontal mergers. While merger simulations are highly useful in
predicting true price effects of mergers, they are demanding in terms of data and can be
sensitive to methodological assumptions. This often implies that most competition
agencies are not in a position to make use of these tools given the time constraints in
merger cases. In the proceeding we therefore mainly focus on price pressure tests when
considering measures of market power in two-sided markets.
3. Market power in multi-sided markets
In this section we explore measures of market power in multi-sided markets that can be
employed by competition agencies. A key question is how the measures developed for
one-sided markets can be adjusted to analyse merger effects in multi-sided markets. As
pointed out in the introduction, multi-sided markets differ from traditional one-sided
markets in that (i) firms serve more than one consumer group and (ii) there exists indirect
network effects across the consumer groups. The vast economic literature that has
emerged on multi-sided markets clearly demonstrates that the presence of network effects
changes firms’ strategic behavior and thus the nature of competition.
However, in absence of network externalities across consumer groups, there is really no
difference between one-sided and multi-sided markets. In this case, the competition
authorities can assess the effects of the merger on the different sides of the market
separately, using the standard tools for one-sided markets, as presented above. Indeed,
this is what has been done by competition authorities in many cases until recently. Below
we will show that the standard tools can be misleading in the presence of network effects,
and present new tools for analysing mergers in multi-sided markets. 11
While the literature on multi-sided markets is vast, there are only a few recent studies
developing operational tools for competition authorities’ assessment of mergers in such
markets. An important contribution is the paper by Affeldt et al. (2013) who extend the
UPP measures to two-sided markets. They show that, due to the two-sidedness, the UPP
measures depend on four sets of diversion ratios that can either be estimated using
market-level demand data or elicited in surveys. In an application, they evaluate a
hypothetical merger in the Dutch daily newspaper market. Their results demonstrate that
it is important to take the two-sidedness of the market into account when evaluating UPP.
Let us briefly present the UPP measured developed by Affeldt et al. (2013) for two-sided
markets. In two-sided markets, firms set two prices, one to each consumer group.
Following their example, newspaper 1 set a price 𝑃𝑃1𝐴𝐴 in the advertising market and price
𝑃𝑃1𝑅𝑅 in the readership market, where each of the prices are affecting newspaper 2 in both
markets. A higher 𝑃𝑃1𝑅𝑅 shifts readers from news-paper 1 to newspaper 2. This makes
newspaper 2 more attractive for advertisers, yielding a shift in advertisers to newspaper 2
from newspaper 1. Moreover, a higher 𝑃𝑃1𝐴𝐴 shifts advertisers from newspaper 1 to
newspaper 2. If consumers dislike (like) ads, this shifts readers to (from) newspaper 1
from (to) newspaper 2. Thus, price changes in multi-sided markets involve direct demand

effects, as in one-sided markets, but importantly also feedback effects across sides
(consumer groups) due to network externalities.
Building on Farrell and Shapiro (2010), Affeldt et al. (2013) derive two UPP conditions
for each firm, one for each side of the market. Considering a merger between newspaper
1 and 2, the UPP condition for newspaper 1 in the readership market is given by
𝑈𝑈𝑈𝑈𝑈𝑈1𝑅𝑅 = (𝑃𝑃2𝑅𝑅 − 𝐶𝐶2𝑅𝑅 )𝐷𝐷12
𝑅𝑅𝑅𝑅
− 𝐸𝐸1𝑅𝑅 𝐶𝐶1𝑅𝑅 + �𝑃𝑃2𝐴𝐴 − 𝐶𝐶2𝐴𝐴 �𝐷𝐷12
𝑅𝑅𝑅𝑅
+ 𝐸𝐸1𝐴𝐴 𝐶𝐶1𝐴𝐴 𝐷𝐷11
𝑅𝑅𝑅𝑅
≥0
where the two first terms are the standard UPP measure for one-sided markets, consisting
of the "upward pricing pressure" based on the value of diverted sales from newspaper 1 to
newspaper 2, (𝑃𝑃2𝑅𝑅 − 𝐶𝐶2𝑅𝑅 )𝐷𝐷12𝑅𝑅𝑅𝑅
, net of the "downward pricing pressure" due to merger-
related cost synergies in the production of newspaper 1, − 𝐸𝐸1𝑅𝑅 𝐶𝐶1𝑅𝑅 . However, it is worth
emphasising that firms in multi-sided markets often set user prices below marginal costs,
𝑃𝑃2𝑅𝑅 < 𝐶𝐶2𝑅𝑅 , in order to capitalise on the network effect in the advertising market. In this
case the first term in the UPP measure would be negative, yielding a downward price
pressure, which is opposite of one-sided markets. 12
The two last terms in the UPP condition capture the network effects in two-sided markets.
The first term �𝑃𝑃2𝐴𝐴 − 𝐶𝐶2𝐴𝐴 �𝐷𝐷12𝑅𝑅𝑅𝑅
is the value of diverted sales from newspaper 1 to
newspaper 2 in the advertising market of an increase in the reader price of newspaper 1,
𝑅𝑅𝑅𝑅
where the diversion ratio 𝐷𝐷12 measures the share of advertisers that switch due to fewer
readers of newspaper 1. This is likely to be positive in the case of newspapers, but
𝑅𝑅𝑅𝑅
generally 𝐷𝐷12 can take any sign depending on the nature of the network externality. This
is an additional effect, not present in one-sided markets, which yields an upward
(downward) pricing pressure if the network externality is positive (negative).
The second term 𝐸𝐸1𝐴𝐴 𝐶𝐶1𝐴𝐴 𝐷𝐷11
𝑅𝑅𝑅𝑅
is the synergy effect in advertising costs for newspaper 1, as a
result of the change in the number of advertisers induced by the increase in the reader price.
For the newspaper market, this term is likely to involve a downward pricing pressure on the
reader price. The reason is that synergies in advertising costs imply a higher profit margin
on advertisers, which makes newspaper 1 more reluctant to increase reader prices, as this
𝑅𝑅𝑅𝑅
lowers circulation and thus demand from advertisers. Thus, the "diversion ratio" 𝐷𝐷11 is
likely to be negative in the case of newspapers, but generally the sign depends on the nature
of the network externalities across the different sides of the market.
Affeldt et al. (2013) derive an equivalent condition for the UPP on the advertising side,
which is
𝑈𝑈𝑈𝑈𝑈𝑈1𝐴𝐴 = �𝑃𝑃2𝐴𝐴 − 𝐶𝐶2𝐴𝐴 �𝐷𝐷12
𝐴𝐴𝐴𝐴
− 𝐸𝐸1𝐴𝐴 𝐶𝐶1𝐴𝐴 + (𝑃𝑃2𝑅𝑅 − 𝐶𝐶2𝑅𝑅 )𝐷𝐷12
𝐴𝐴𝐴𝐴
+ 𝐸𝐸1𝑅𝑅 𝐶𝐶1𝑅𝑅 𝐷𝐷11
𝐴𝐴𝐴𝐴
≥0
As for the previous condition, the two first terms are the standard UPP measures for one-
sided markets. The third term is the value of diverted sales from newspaper 1 to
newspaper 1 on the reader side, resulting from an increase in the advertising price 𝑃𝑃1𝐴𝐴 of
𝐴𝐴𝐴𝐴
newspaper 1. The diversion ratio 𝐷𝐷12 measures the share of readers that switch
newspaper as a result of less advertising in newspaper 1, where the sign depends on
whether readers like or dislike advertising. Notice also that the profit margin on the user
side can be, and often is, negative (𝑃𝑃2𝑅𝑅 < 𝐶𝐶2𝑅𝑅 ), which further complicates the
computation of the UPP condition in multi-sided markets. If the profit margin is negative,
then (𝑃𝑃2𝑅𝑅 − 𝐶𝐶2𝑅𝑅 )𝐷𝐷12
𝐴𝐴𝐴𝐴
is positive (negative) if readers dislike (like) ads, and zero if readers
are indifferent.
The last term 𝐸𝐸1𝑅𝑅 𝐶𝐶1𝑅𝑅 𝐷𝐷11
𝐴𝐴𝐴𝐴
captures merger-related synergies in the news production, where
𝐴𝐴𝐴𝐴
𝐷𝐷11 is the change in the number of readers relative to advertisers. A higher advertising

price 𝑃𝑃1𝐴𝐴 implies less advertisers, which may have an impact on the number of readers,
depending on the nature of the network externality, as explained above. Lower costs in
news production yield a higher (or less negative) profit margin on readership. Thus, if
readers like (dislike) ads, this term implies a downward (upward) pricing pressure on the
advertising price of newspaper 1.
Affeldt et al. (2013) derive also GUPPI measures, which ignore efficiency gains, for two-
sided markets:
𝑃𝑃𝑅𝑅 𝑃𝑃𝐴𝐴
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺1𝑅𝑅 = 𝑚𝑚2𝑅𝑅 𝐷𝐷12
𝑅𝑅𝑅𝑅 2
𝑃𝑃𝑅𝑅
+ 𝑚𝑚2𝐴𝐴 𝐷𝐷12
𝑅𝑅𝑅𝑅 2
𝑃𝑃𝑅𝑅
,
1 1
𝑃𝑃 𝐴𝐴
𝐴𝐴𝐴𝐴 2
𝑃𝑃2𝑅𝑅
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺1𝐴𝐴 = 𝑚𝑚2𝐴𝐴 𝐷𝐷12 + 𝑚𝑚2𝑅𝑅 𝐷𝐷12
𝐴𝐴𝐴𝐴
𝑃𝑃1𝐴𝐴 𝑃𝑃1𝐴𝐴
where 𝑚𝑚2𝑅𝑅 and 𝑚𝑚2𝐴𝐴 are the profit margins (in percentage) of newspaper 2 in readership and
advertising markets, respectively. The first term in each of the conditions is the standard
GUPPI measure in one-sided markets, whereas the second term captures the network
externalities across the two sides of the market, as explained above.
A recent paper by Cosnita-Langlais et al. (2017) extends (and modifies) the UPP
measures developed by Affeldt et al. (2013). A key point in their paper is that Affeldt et
al. (2013), when deriving the UPP measures, fail to account for within firm feedback
effects in the pricing on the two sides. More precisely, Cosnita-Langlais et al. (2017)
argue that it is unreasonable to assume that the price on one side (say, advertising price
𝑃𝑃1𝐴𝐴 ) is constant when setting the price on the other side (say, reader price 𝑃𝑃1𝑅𝑅 ). 13 Allowing
for within firm feedback effects across the two sides of the market, they derive modified
versions of the GUPPI formula, though under the assumptions of symmetry and linear
demand
𝑅𝑅𝑅𝑅
𝐷𝐷11 𝑅𝑅𝑅𝑅
𝐷𝐷11
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺1𝑅𝑅 = 𝑚𝑚2𝑅𝑅 �𝐷𝐷12
𝑅𝑅𝑅𝑅
+ 2
𝐴𝐴𝐴𝐴
𝐷𝐷12 �+ 𝑚𝑚2𝐴𝐴 �𝐷𝐷12
𝑅𝑅𝑅𝑅
+ 2
𝐴𝐴𝐴𝐴
𝐷𝐷12 �,
𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴
𝐷𝐷11 𝐷𝐷11
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺1𝐴𝐴 = 𝑚𝑚2𝐴𝐴 �𝐷𝐷12
𝐴𝐴𝐴𝐴
+ 𝑅𝑅𝑅𝑅 𝑅𝑅 𝐴𝐴𝐴𝐴
𝐷𝐷 � + 𝑚𝑚2 �𝐷𝐷12 + 𝑅𝑅𝑅𝑅
𝐷𝐷12 �
2 12 2
Notice that the first term inside each bracket is the same as in Affeldt et al. (2013). The
additional effect that is pointed out by Cosnita-Langlais et al. (2017) is represented by the
second term in each of the brackets. As they highlight in their paper, these additonal
effects can imply that a merger leading to a price increase on one (say, advertising) side
of the market may lead to a price reduction on the other (say, reader) side, even if there
are no efficiencies and margins are non-negative. This is not case in Affeldt et al. (2013).
Notice, however, that the set of diversion ratios are the same as for the UPP measures by
Affeldt et al. (2013).
4. Measurement issues in multi-sided markets
In this section we explore how competition authorities can operationalise the market
power tools described above, and obtain reliable estimates of key parameters in multi-
sided markets. An important feature of the pricing pressure indices is that they are based
on parameters that, in principle, are observable to competition authorities, such as
diversion ratios and profit margins in the pre-merger (today) situation. This is not the case
for cost synergies, where the estimates usually are based on plausible "guesses" of future
merger-related cost savings.

The price pressure indices for two-sided markets suggest that competition authorities
need to (i) look at both sides of the market, as an upward pricing pressure on one side can
imply a downward pricing pressure on the other side, and (ii) obtain estimates for
diversion ratios across sides (readers and advertisers) both within and across the merging
firms (newspaper 1 and 2). Following Affeldt et al. (2013), competition authorities, when
assessing mergers in two-sided markets, have to obtain estimates of the following
diversion ratios for the merging parties:
𝑅𝑅𝑅𝑅 𝐴𝐴𝐴𝐴
1. Across products diversion ratios on each of side of the market: 𝐷𝐷12 and 𝐷𝐷12
𝐴𝐴𝐴𝐴 𝑅𝑅𝑅𝑅
2. Across products and sides diversion ratios: 𝐷𝐷12 and 𝐷𝐷12
𝐴𝐴𝐴𝐴 𝑅𝑅𝑅𝑅
3. Within products but across sides diversion ratios: 𝐷𝐷11 and 𝐷𝐷11
Estimates of the six diversion ratios can be obtain by using market or survey data from
the different consumer groups on each side of the market. To illustrate the importance of
accounting for network externalities in two-sided markets, Affeldt et al. (2013) consider a
hypothetical merger in the Dutch daily newspaper. Using estimates for demand
elasticities, prices and marginal costs based on market data, as derived by Filistrucchi et
al. (2012), they compute different UPP measures. Their exercise demonstrates significant
differences between the UPP measures for one-sided and two-sided markets. In particular,
the merger effect in the advertising market is only detected when allowing for network
externalities in the UPP formula.
However, estimates for demand elasticities and marginal costs are usually not available,
and competition authorities need to collect information on diversion ratios using customer
surveys. In a multi-sided market, the survey would need to be more comprehensive, as
one would need to survey consumer groups on all sides of the market. Moreover, one
need to ask the different consumer groups not only how they would react to a price
increase but also how they would react to a change in participation on the other side. 14 A
further complication is that survey results are sensitive to the design of the survey.
Before concluding, let us briefly describe a merger case in the newspaper market in
Norway that was investigated by the Norwegian Competition Authority (NCA). 15 In late
2011 the NCA assessed a proposed merger between the second and the third largest
media houses in Norway. While the parties had several overlapping activities, the concern
for competition was related to local newspapers in overlapping geographical areas. In the
merger assessment, the NCA examined the effects of the merger in both the reader and
advertising markets. The assessment was based on customer surveys of subscribers and
advertisers in six local newspapers. The samples of readers and advertisers were based on
a randomised selection from the actual customer lists of the newspaper, with the final
sample consisting of 200 subscribers and 25 percent of the advertisers for each of the six
newspapers. Information on the consumer groups’ second choice of newspaper was
collected through telephone surveys, asking the question of which newspaper the
subscribers and advertisers would choose if their first choice did not exist. Table 1
summarises the diversion ratios on the two sides of the market.

Table 1. Merger A-pressen - Edda Media, Diversion ratios
Subscribers Advertisers
Telemarks avisa → Varden 60% 84%
Telemark county
Varden → Telemarks avisa 51% 49%
Fredrikstad blad → Demokraten 20% 37%
Ostfold county
Demokraten → Fredrikstad blad 20% 58%
To capture the network externality across the two sides of the newspaper market, the
NCA conducted a survey among the subscribers on how they would respond to more
advertisement in the newspaper. The survey showed that consumers were more or less
indifferent towards advertising, suggesting only a one-way network externality from
readers to advertisers. The latter was not measured. The NCA proceed by considering the
two sides of the market independently, but with a discussion of the network externality
from readers to advertisers. The merger was eventually approved in June 2012, with the
remedy that the parties divested two newspapers, one in each of the local markets.
While this case is an early attempt to account for network externalities of mergers in two-
sided markets, the analysis by the NCA has, in light of the UPP measures described
above, analysis several shortcomings. First, the NCA did not estimate the profit margins,
which is important in two-sided markets. As shown above, if the newspaper profit margin
on the reader side is negative, the network externality effect is likely to impose a
downward pricing pressure on the reader price, whereas the opposite is true if this profit
margin is positive. Second, the NCA did not estimate diversion ratio related to the
network externality from readers to advertisers, which would be a necessary input in the
computation of the UPP measures accounting for the two-sidedness, as shown by Affeldt
et al. (2013).
5. Concluding remarks
In this paper we have reviewed the recent literature on market power measures in multi-
sided market, and based on this described operational tools that can be employed by
competition agencies, especially in the assessment of mergers in such markets. The paper
has focused mainly on the recent developments of pricing pressure indices, which is
probably the most likely tools to be used by most com-petition authorities, as full merger
simulations are quite demanding due to tight time constraints in merger cases. The key
lessons from this review can be summarised as follows:
1. Upward pricing pressure on one side of the market may result in downward
price pressure on the other sides due to network externalities;
2. Upward pricing pressure can be reinforced or weakened depending on the
nature of the network externality, i.e. whether the externality is positive or
negative.
3. In case of one-way network externalities (say, only from readers to
advertisers), then standard UPP measures can be employed on the side that
benefits from network externality (advertising side) but not on the other sides
causing the network externality (reader side).
Thus, using standard market power measures developed for one-sided markets yield
misleading estimates of anti-competitive effects of firm behavior. In the case of mergers,
we have shown that competition agencies cannot assess each side of the market
separately, but need to adopt tools that account for possible network externalities across

the different sides of the market. In particular, we have described recent developments in
the economic literature that suggest modified versions of UPP and GUPPI that can be
adopted by competition agencies.
By way of conclusion, we should stress some limitations with the UPP measures. First,
the general critique that applies to using pricing pressure indices in one-sided markets
remains valid also for multi-sided markets. In particular, the fact that no assumption on
demand systems are needed (which determines pass-through) is because both UPP and
GUPPI only calculate the incentive to increase prices unilaterally post-merger but not the
actual price increase. However, what one is ultimately interested in is the change in total
welfare and consumer surplus due to the merger, which is determined by the merger-
induced price change. 16
Second, the UPP measures ignore responses by competitors. If the merging parties
increase their prices post-merger, competitors have an incentive to also increase their
prices in response. This is turn gives the merging parties the incentive to raise prices
further. Hence, UPP and GUPPI tend to underestimate the incentive to increase prices
post-merger in a one-sided market. In a two-sided market, depending on the sign and size
of the indirect network effects, prices on one side might be strategic complements (as in
one side markets) and strategic substitutes on the other side. Therefore, UPP and GUPPI
may either underestimate or overestimate the incentives to increase prices.
Notes
1 See, for instance, Evans and Schmalensee (2016) who clearly demonstrates the importance new
markets related to multi-sided platforms (matchmakers).
2 See, Kaiser and Wright (2006), Kaiser and Song (2009), and Wilbur (2008), for empirical
evidence on this relationship.
3 See, for instance, Anderson and Jullien (2015) or Evans and Schmalensee (2016).
4 Google/DoubleClick (Case COMP/M.4731) Commission Decision 11 March 2008 OJ C 184;
Microsoft/Yahoo (Case COMP/M.5727) Commission Decision 18 February 2010 OJ C 020;
Microsoft/Skype (Case COMP/M.6281) Commission Decision 7 October 2011 OJ C 341;
Facebook/WhatsApp (Case COMP/M.7217) Commission Decision 3 October 2014 OJ C 417.
5 This is obviously a simplification, as it is well known from the economic literature that both
merging and non-merging firms are likely to change their behaviour as a consequence of the
merger.
6 See U.S. Department of Justice & FTC, Horizontal Merger Guidelines § 5.2 (2010).
7 There is, of course, an equivalent UPP condition for product 2.
8 The diversion ratio is formally defined as follows
𝜕𝜕𝑄𝑄2 /𝜕𝜕𝑃𝑃1
𝐷𝐷12 : = ,
−𝜕𝜕𝑄𝑄1 /𝜕𝜕𝑃𝑃1
where Q1 and Q2 are the demands for product 1 and 2. Thus, the diversion ratio measures the
share of consumers of product 1 that switch to product 2 due to a price increase of product 1.
9 Formally, the merger-related efficiency gain of product 1 is defined as follows:
𝐸𝐸1 : = (𝐶𝐶1 − 𝐶𝐶1𝑁𝑁 ) / 𝐶𝐶1 ,

Where 𝐶𝐶1𝑁𝑁 is the post-merger marginal cost of product 1. It is assumed that 𝐶𝐶1𝑁𝑁 ≤ 𝐶𝐶1 such that
𝐸𝐸1 ∈ [0, 1].
10 Schmalensee (2014) provides an alternative version of the UPP by allowing for also efficiency
gains in the production of both products, yielding the following condition
𝑈𝑈𝑈𝑈𝑈𝑈1 = [𝑃𝑃2 − (1 − 𝐸𝐸2 ) 𝐶𝐶2 ] 𝐷𝐷12 − 𝐸𝐸1 𝐶𝐶1 ≥ 0
𝐸𝐸2 is the merger-related efficiency gain in production of product 2, which evidently increases the
upward pricing pressure by increasing the value of diverted sales.
11 See, for instance, Rochet and Tirole (2006) who derive a modified version of the Lerner index for
two-sided markets.
12 Note, however, that if 𝑃𝑃2𝑅𝑅 < 𝐶𝐶2𝑅𝑅 , this must imply that 𝑃𝑃2𝐴𝐴 > 𝐶𝐶2𝐴𝐴 , otherwise the firm is running
deficits.
13 When deriving the UPP formula, Affeldt et al. (2013) assume that all other prices are constant.
14 This has already been done by competition agencies in some merger cases, there are no example,
to our knowledge, of these being used to compute UPP measures accounting for the network
externalities in multi-sided markets.
15 This case (Case 2011/0925: A-pressen AS – Edda Media AS) is described in OECD report (2016)
on the Roundtable on Market Definition in Two-Sided Markets.
16 See, for instance, Fan (2013) for a full merger simulation in the US newspaper market.

References
Affeldt, P., Filistrucchi, L., Klein, T.H., 2013. Upward pricing pressure in a two-sided market. Economic
Journal, 123, 505-523.
Anderson, S.P., Jullien, B., 2015. The advertising-financed business model in two-sided media markets.
Chapter 2 in Handbook of Media Economics (Eds. Anderson, S., Waldfogel, J., Strömberg, D.),
Elsevier, 41-90.
Argentesti, E., Filistrucchi, L., 2007. Estimating market power in a two-sided market: the case of
newspapers. Journal of Applied Econometrics, 22, 1247-1266.
Cosnita-Langlais, A., Johansen, B.O., Sørgard L., 2016. Upward price pressure in two-sided markets:
incorporating feedback effects. Memo.
Fan, Y., 2013. Ownership consolidation and product characteristics: a study of the U.S. daily newspaper
market. American Economic Review, 103, 1598-1628.
Farrell, J., Shapiro, C., 1990. Horizontal mergers: an equilibrium analysis. American Economic Review,
80, 107-126.
Farrell, J., Shapiro, C., 2010. Antitrust evaluation of horizontal mergers: an economic alternative to
market definition. B.E. Journal of Theoretical Economics, 10, article 9.
Filistrucchi, L., Klein, T.J., Michielsen, T., 2012. Assessing unilateral merger effects in a two-sided
market: an application to the Dutch daily newspaper market. Journal of Competition Law and
Economics, 8, 1–33.
Hausmann, J., Moresi, S., Rainey, M., 2011. Unilateral effects of mergers with general linear demand.
Economics Letters, 111, 119-121.
Kaiser, U., Wright, J., 2006. Price Structure in Two-Sided Markets: Evidence from the Magazine
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Kaiser, U., Song, M., 2009. Do media consumers really dislike advertising? An empirical assessment of
the role of advertising in print media markets. International Journal of Industrial Organization 27,
292-301.
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February 2010.
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DAF/COMP/WD(2012)21.
Rochet, J.-C., Tirole, J., 2006. Two-sided markets: a progress report. RAND Journal of Economics, 37,
645-667.
Salop, S.C., Moresi, S., 2009. Updating the merger guidelines: comments. Mimeo, Charles River
Associates, London.
Wilbur, K.C., 2008. A two-sided, empirical model of television advertising and viewing markets.
Marketing Science, 27, 356-378.

PART IV. EXCLUSIONARY CONDUCT │ 101
Part IV. Exclusionary conduct

5. EXCLUSIONARY CONDUCT IN MULTI-SIDED MARKETS │ 103
5. Exclusionary conduct in multi-sided markets
By Michael L. Katz 1
1. Introduction
The topic of this paper lies at the intersection of two concepts: multi-sided markets and
exclusionary behaviour. This is a challenging topic for at least two reasons. First, there is
a lack of consensus as to what constitutes a multi-sided market. Second, there is
considerable disagreement about what constitutes exclusionary behaviour —whether or
not one is examining a multi-sided market.
The lack of a consensus definition of multi-sided markets is somewhat easier to address
(or, at least, to hold to one side). Suppliers in multi-sided markets are often referred to as
“platforms” because they serve as bases on which users from different sides of the
markets can interact with one another. For antitrust purposes, a useful definition of a
multi-sided market is that there are cross-platform network effects (i.e. the presence of
members of group A as users on one side of the platform makes the platform more
attractive to members of group B on the other side) in at least one direction for a platform
that facilitates interactions between two or more groups of users, can set distinct prices to
different user groups, and has market power with respect to those groups. 1 This definition
captures the sorts of situations that are commonly labelled as platforms or multi-sided
markets in recent antitrust litigation.
The lack of agreement regarding what constitutes exclusionary behaviour is more
problematical. There is a broad consensus that conduct is exclusionary when it harms the
competitive process by weakening the ability of rival firms to compete and the conduct
does not constitute competing on the merits. However, there is considerable disagreement
regarding what it means to “harm competition” or to fail to “compete on the merits”.
Consequently, the discussion below begins, in Section 2, with an examination of broad
conceptions of exclusion, without focusing specifically on multi-sided markets.
The paper then turns to the question: How should antitrust enforcers and the courts
identify whether the conduct of a firm operating in a multi-sided market is exclusionary? 2
As Rochet and Tirole (2006, p. 646) have observed, multi-sided markets combine
elements of multi-product pricing and network effects. As a result, the issues are not
entirely new or unique, but they are challenging nonetheless. Specifically, multi-product
pricing and network effects raise several issues for competition policy’s treatment of
exclusionary behaviour:
1
Sarin Professor Emeritus in Strategy and Leadership, Haas School of Business, and Professor
Emeritus of Economics, University of California Berkeley

104 │ 5. EXCLUSIONARY CONDUCT IN MULTI-SIDED MARKETS
• By giving rise to demand-side economies of scale, network effects can create

mechanisms by which a supplier can successfully weaken or eliminate rival
suppliers through conduct that denies them scale. Indeed, at least in theory, a
weakened rival may enter a “death spiral,” whereby it loses users, which then
triggers the loss of more users due to the loss of network effects, which then leads
to the loss of still more users, which then... Thus, the existence of network effects
may heighten concerns regarding the possibility of exclusionary behaviour.
• In the presence of demand-side economies of scale, “innocent” competitive
conduct intended to improve a supplier’s ability to create value for its users may
also weaken or even eliminate rivals, which can greatly complicate the
identification of exclusionary behaviour. The potentially critical role of users’
expectations -which can be hard to measure and predict- further complicates the
analysis.
• Cross-platform network effects raise the danger of examining effects too
narrowly. One possible error from an overly-narrow analysis is that important
feedback loops among different sides of the platform may be missed.
• In the presence of network effects, the linkage between competition and economic
welfare can be complex. For example, entry by an incompatible platform may
splinter users and lead to a loss of realised network effects, lowering total surplus.
• The linkage between competition and economic welfare can also be complex
when suppliers produce multiple products at least some of which are subject to
joint production, as is often the case with platforms that facilitate transactions
among users. In the presence of joint production, changes in the nature of
competition to serve one group of users can affect the economic welfare of other
groups of users.
• The combination of multi-product pricing and cross-platform network effects can
give rise to situations in which certain forms of platform conduct or changes in
the nature of competition can benefit some user groups while harming others. The
possibility of differential effects on different user groups makes it necessary to
have a more refined sense of the overall policy objective than is often the case.
In order to sharpen the discussion of the implications of these facts for competition
policy, the paper addresses these issues in the context of specific types of potentially
exclusionary conduct. One can categorise exclusionary conduct generally as falling into
one of two categories 3:
• Predation. Under a predatory strategy, a seller offers buyers excessively good
deals in order to deny business to rivals and weaken their abilities to compete.
• Raising Rivals’ Costs. Under a raising-rivals’ costs strategy, a seller takes actions
to make it more costly for rival sellers to serve buyers, thus weakening the rivals’
abilities to compete.
One example of each type of behaviour is examined below. Section 3 considers predatory
pricing and identifies several potential pitfalls in relying on bright-line price-cost tests to
identify predatory pricing. It also discusses the importance of understanding the specific
mechanism by which a firm recoups its investment in below-cost prices rather than
focusing solely on whether the firm rationally anticipated recouping its investment.
Section 4 examines conduct that directly or indirectly limits a user’s ability to participate
on multiple platforms simultaneously (a practice known as “multi-homing”). It is shown
that, in the presence of certain asymmetries, this conduct can weaken competition. The
paper closes with a few broad observations on competition policy in multi-sided markets.

2. Conceptions of exclusionary behaviour
Several approaches to distinguishing exclusionary behaviour from competitive behaviour

have been proposed and applied. This section briefly describes and assesses three leading
approaches in turn.
Harm to social welfare due to harm to competition

One approach is to label conduct as exclusionary if it both: (a) harms competition, and (b)
reduces some measure of social welfare (e.g. consumer surplus or total surplus) relative to
a baseline in which the conduct is not undertaken. 4 An appealing feature of the test is that
it can be directly linked to the ultimate objective of competition policy, either consumer
surplus or some broader measure of economic welfare. However, this test also has several
weaknesses. 5
One weakness is that the test relies on the (undefined) notion of harming competition. In
the case of a merger, there may appear to be natural sense in which competition is
reduced, but in many other cases there is not. In a predatory pricing case, for example, the
plaintiff will allege that competition is being harmed while the defendant will argue that it
is simply “competing on the merits.” By failing to define harm to competition, this
standard ducks one of the most critical issues.
One might attempt to argue that problem would go away if one eliminated prong (a) of
the standard or, equivalently, defined any conduct that reduces social welfare to be
exclusionary. However, such an approach would be inconsistent with U.S. law6 and, more
broadly, would equate competition policy with regulation. Attempting to regulate a firm’s
conduct to ensure that it maximises some measure of social welfare -particularly if it is a
long-run, forward-looking measure- imposes very strong informational and computational
demands on the regulator, which is one of the reasons why modern market economies
generally limit pervasive regulation to a relatively small subset of markets. A harm-to-
competition screen serves to limit the set of circumstances in which the difficulties of
determining welfare effects have to be confronted.
Of course, even with a screen in place, these difficulties will have to be confronted in
some cases. Hence, a second weakness of a social-welfare test is that it can be difficult to
administer and can distort the behaviour of both potential excluders and their targets.
Melamed (2005, p. 1254) argues that, at the time it is choosing its course of conduct, a
potential defendant would lack the information necessary to make a reliable prediction of
the effects of its actions on a social welfare measure based on consumer surplus and/or the
profits of rival suppliers. The potential defendant’s uncertainty could create a status-quo
bias because conduct that led to significant changes in the market outcome might be more
likely to be found to be exclusionary. Moreover, what is ostensibly a total-surplus
standard could, in practice, become a competitor-surplus standard because a seller might be
concerned that its behaviour would generate complaints from rivals when the firm’s
conduct lowered their profits and they perceived a chance of prevailing under this
standard.7 Melamed (2005, p. 1254) also argues that the test could create economically
perverse incentives for the defendant’s rivals to refrain from competing vigorously in order
to enhance their claims that the defendant’s conduct had harmed consumers and/or the
rivals.

Equally-efficient-rival test
A second test asks whether an equally efficient rival could compete successfully in the
presence of the challenged conduct. If the answer is yes, then by this test the conduct is
not exclusionary. 8 This test builds on an intuitive notion of harming competition under
which, if a firm is competing on the merits, then an equally matched rival should find
itself capable of competing successfully as well. Unfortunately, this approach suffers
from both practical and conceptual shortcomings.
A severe practical shortcoming is that, in actual markets, it can be very difficult to
determine what it means to be an equally efficient rival. When each supplier offers a
single product that is undifferentiated from those of its rivals, the determination is
straightforward: a rival offering the same product to consumers is equally efficient if it
has costs lower or equal to those of the firm in question. However, when products are
differentiated, it is necessary to account for the differences. It can be extremely difficult
to determine whether a competitor is equally efficient when product characteristics and
business strategies are multidimensional and vary across firms. For example, given the
many differences in their business models, it might be very difficult to assess whether
American Express and MasterCard are equally efficient credit and charge card platforms.
In markets with network effects, additional issues arise. Should the size of a rival’s
installed base be taken into account in defining what it means to be equally efficient? If it
is, then there may be a risk that this test will become extremely weak because it would
find any conduct that leveraged a dominant firm’s installed base advantage to be non-
exclusionary regardless of how it affected competition and consumer welfare. However,
not taking installed bases into account might have the effect of forcing a firm with a large
installed base to refrain from competing vigorously with a smaller rival.
In summary, the equally-efficient-rival test can be very hard for the courts to apply, and it
can thus create uncertainty for potential defendants and lead to some of the problems
associated with application of a social-welfare standard as discussed above.
An even deeper shortcoming of the equally-efficient rival test is that its focus on an as-
efficient competitor lacks a sound grounding in economics. Specifically, there is not a
tight linkage between: (a) the consumer and total-welfare effects of competition between
two firms, and (b) whether the two firms are equally efficient suppliers. For example, in
the presence of production economies of scale, the entry of an equally efficient rival can
lead to higher industry costs to produce a given amount of output, and -from the
perspective of total surplus- these higher costs may dominate any benefits of the
additional competition due to entry. A similar problem can arise with network effects,
which give rise to demand-side economies of scale. In the other direction, consumer
surplus will often rise following entry even if the entrant is less efficient than the
incumbent. Indeed, given the effects on prices and consumption, entry by an inefficient
entrant can raise total surplus in some instances.
The equally-efficient-rival test broadly underlies the European Commission’s assessment
of price-based exclusionary behaviour and whether it might give rise to consumer harm. 9
However, the Commission recognises that excluding a less efficient competitor can harm
competition in some circumstances. 10 The Commission also recognises that, in the
presence of network effects, a rival’s efficiency can be affected by exclusionary
conduct. 11

The no-economic-sense test

A third, widely proposed test for exclusionary behaviour is the no-economic-sense test. In
broad strokes, the no-economic-sense test limits the concept of exclusion to conduct that
makes no economic or business sense but for the likelihood of harming competition. 12
The U.S. Department of Justice has used this test in several cases alleging exclusionary
behaviour. 13
The no-economic-sense test is related to what is sometimes referred to as a profit-
sacrifice test. 14 Although there does not appear to be complete agreement on the
definition of a profit-sacrifice test, one form considers the conduct in question to be
exclusionary only if it involves a short-run profit sacrifice in order to obtain long-run
benefits from the weakening of competition.
Melamed (2005, p. 1255) argues that, because the no-economic-sense test focuses on the
economic welfare of the potential defendant, it does not suffer from some of the problems
associated with tests based in whole or part on consumer or rival welfare. It is plausible
that a potential defendant will better be able to predict how its actions will affect its own
profits rather than consumer or competitor welfare. However, one should not minimise
the difficulties of making the relevant determinations. A critical element of applying the
no-economic-sense test is to estimate the “but-for world” (i.e. what would happen absent
the challenged conduct). This counterfactual situation serves as the benchmark for
whether the challenged conduct would be profitable if it had no effect on the strength of
competition. Estimating the but-for world can be very difficult. For example, it can
necessitate estimating the future effects of alleged predatory pricing or determining what
the market equilibrium would have looked like had rivals not been weakened by the
imposition of exclusivity requirements.
Lastly, it should be noted that reliance on the no-economic-sense test is not equivalent to
requiring the firm to maximise either consumer or total surplus. For example, for a firm
that faces no competition, charging profit-maximising, monopoly prices makes economic
sense even though charging prices closer to marginal cost would raise both consumer and
total surplus. And there can be situations in which entry reduces total economic surplus
but the dominant incumbent supplier will find it profitable to undertake conduct that
excludes the entrant only if the incumbent can count as profits the benefits of eliminating
competition. However, the no-economic-sense test would not allow the use of such
benefits as a justification for the (welfare-improving) conduct.
3. Predatory pricing in a multi-sided market
Next consider the definition of exclusion for the specific practice of predatory pricing.
Following the U.S. Supreme Court in Brooke Group, U.S. courts apply a two-part test for
predation. “First, a plaintiff seeking to establish competitive injury resulting from a rival's
low prices must prove that the prices complained of are below an appropriate measure of
its rival's costs.” 15 “The second prerequisite to holding a competitor liable under the
antitrust laws for charging low prices is a demonstration that the competitor had a
reasonable prospect, or ... dangerous probability, of recouping its investment in below
cost prices.” 16 The European Union standard has a multi-band price-cost prong: (a) if
price is below average variable costs, then there is a presumption of predatory pricing that
the defendant can then attempt to rebut, and (b) if price is above average variable cost but
below average total cost, then the plaintiff must establish that the pricing is intended to
eliminate competitors. 17 The European Union standard does not have a required

recoupment prong 18, although the European Commission sometimes considers

recoupment. 19 Moreover, the Commission examines whether market conditions are such
that predation could successfully harm competition, which entails looking at many of the
same factors as would a recoupment analysis (e.g. entry and re-entry barriers). 20 Indeed,
one interpretation of the recoupment prong is that it is a test of whether the allegedly
predatory pricing would significantly harm competition.
Pricing below some measure of cost

The leading variant of the price-cost prong of the Brooke Group approach -the Areeda-
Turner rule- compares price to marginal cost or to average variable cost as a proxy. 21
Average variable cost also plays a central role in the European Union’s analysis. There
are, however, several issues regarding use of this comparison as part of a test for
predation that arise even when it is applied to markets that do not entail the complications
of a multi-sided platform.
A first issue is that, under the no-economic-sense test, pricing above cost can be
exclusionary. Under this test (or even a short-run profit sacrifice test), one should
compare marginal revenue (MR) with marginal cost (MC). If MR < MC, then the firm is
not charging a profit-maximising price. For firms of interest to competition policy
authorities, firm-specific demand curves are downward sloping and marginal revenue is
less than price (p). Consequently, there is a range of prices for which MR < MC < p.
Depending on the overall fact pattern, such prices could be predatory in that they make
sense only because they weaken future competition.
Observe that the possibility of such above-cost predation is not unique to markets with
network effects, cross-platform or otherwise. What is necessary is that there be some
mechanism such that the firm’s lowering its price weakens competition. Although
network effects provide one such mechanism (i.e. lower prices can reduce the user bases
of rival platforms, thus reducing their ability to offer users value), there are others.
Whatever the mechanism, the predator weighs the reduction in its profits due to low
current prices -which occurs for any price such that MR < MC- with the gains from
weakening rivals. Stated in terms of the no-economic-sense test, the incumbent is
engaged in predation if it would have priced even higher if not for the value of weakening
its rivals.
Even though above-cost pricing can be deemed predatory in some circumstances, this
approach has been rejected by some of the antitrust literature as undesirable because such
a rule would be hard to implement and could be subject to high rates of error. 22
A second issue with the Areeda-Turner test is that, under the no-economic-sense
standard, pricing below marginal cost can constitute competition on the merits. In non-
network, non-platform markets, such competition can take the form of temporary,
“introductory” offers or the permanent offering of menus, where a free version is offered
as a “gateway” to paid versions (known as a freemium model) 23.
Network effects can also provide a mechanism for below-cost competition on the
merits. 24 To see why, consider a market in which there are network effects with only a
single type of user (as can arise, for example, with a communication network in which
everyone both sends and receives messages) but different user cohorts over time. A
supplier may find it profitable to charge lower prices early on in the product’s life in
order to build up its installed base, which then makes its network more attractive to future
user cohorts and, thus, allows the supplier to charge higher prices. This type of initial

below-cost pricing can be profitable even for a monopolist facing no threat of entry,
which demonstrates that such pricing can be motivated by considerations other than
exclusion. In addition to benefiting the supplier, this type of pricing can benefit
consumers by internalising what would otherwise be externalities across user cohorts (i.e.
early users do not take into account the benefits of a larger network size that their
purchases confer on later user cohorts). However, as discussed above, a supplier can also
be motivated by an exclusionary desire to deny its rivals the benefits of increasing their
own installed bases. Indeed, both types of incentives can be present simultaneously. 25
The fact that above-cost prices are predatory in some circumstances, and below-cost
prices constitute competition on the merits in others, strongly suggest that there is no
good price-cost test in the presence of network effects. Using a formal model of same-
side network effects with two user cohorts, Farrell and Katz (2005) have shown that price
floors that fully promote total surplus would have to depend on user expectation and
co-ordination processes that are unlikely to be observable in practice. In many respects,
the two user cohorts in a two-period model of same-side network effects play the same
role as the two user groups on opposite side of a platform. 26 Hence, these results strongly
suggest that price-cost test is problematical when applied to a multi-sided platform.
Suppose that, despite the issues inherent in the use of marginal cost as a bright line for
identifying predatory pricing, one attempts to extend the Areeda-Turner price-cost test to
multi-sided markets. Consider a platform that facilitates exchanges between members of
user group A and user group B. A naive application of the Areeda-Turner test might focus
on the pricing to users on one side of the platform, say side A, in isolation. That is, the
price-cost prong would examine whether 𝑝𝑝𝐴𝐴 is less than 𝑐𝑐𝐴𝐴 , where 𝑝𝑝𝐴𝐴 is the price charged
to members of user group A, and 𝑐𝑐𝐴𝐴 is the marginal cost of providing a unit of platform
services to a member of user group A.
As has long been emphasised by contributors to the academic literature on multi-sided
platforms, this naive approach can be highly misleading. 27 To see why, consider a
platform that: (a) facilitates one-to-one transactions; (b) charges fees to users solely on a
per-transaction basis (i.e. it does not charge subscription fees); and (c) incurs only fixed
costs or per-transaction costs (i.e. there are no marginal costs associated with changes in
the number of platform subscribers if ones holds the total number of transactions fixed).
Let 𝑥𝑥𝐽𝐽 denote quantity of platform services consumed by users on side J. For such
platforms, 𝑥𝑥𝐴𝐴 ≡ 𝑥𝑥𝐵𝐵 and there may be no sound basis for assigning costs to one side or
other. Let 𝑐𝑐𝑇𝑇 denote the total marginal costs associated with a transaction. Because costs
are associated with transactions -not one side of the market or the other- and because
transactions only occur if both sides participate, it also makes sense to think of revenues
at the transaction level. That is, the firm earns 𝑝𝑝𝐴𝐴 + 𝑝𝑝𝐵𝐵 per transaction. Applied at the
transaction level, the two-sided market version of the Areeda-Turner test compares
𝑝𝑝𝐴𝐴 + 𝑝𝑝𝐵𝐵 with 𝑐𝑐𝑇𝑇 .
This comparison highlights the fact that a simple, one-sided price can be misleading.
Under the naive approach, policy enforcers would have to assign some share of the total
transactions costs to one side of the market. Let 𝜆𝜆 denote the percentage of the cost of a
transaction allocated by the competition authority to side A. It could well be the case that
the naive, one-sided version of the test indicates below-cost pricing (i.e. 𝑝𝑝𝐴𝐴 − 𝜆𝜆𝑐𝑐𝑇𝑇 < 0)
while the two-sided version does not (i.e. 𝑝𝑝𝐴𝐴 + 𝑝𝑝𝐵𝐵 − 𝑐𝑐𝑇𝑇 > 0). Because the one-sided
version would rely on arbitrary allocations of costs and revenues, it is difficult to see why
it would be preferred to the two-sided version, which examines costs and revenues at the
transaction level.

Another way to see the dangers of focusing solely on one side of a multi-sided market is
to recognise that there is an important sense in which a multi-sided market is no different
than any other -in each case, it is necessary to compare prices and costs. For some
purposes, it is not too much of stretch to consider any firm as a platform that facilitates
transactions between input suppliers and output buyers, where the input suppliers pay
negative prices to participate on the platform. From this perspective, looking at the price
paid by buyers minus the price paid to input owners amounts to taking both sides of the
market into account at once. Moreover, in the presence of network effects, users on one
side of platform can be viewed as inputs to the supply of services to users on the other
side, and the cost of that input has to be taken into account.
Behringer and Filistrucchi (2015) derive the two-sided analog of the Areeda-Turner test
for platforms that are not pure transaction facilitators. One example of this type of
platform is a media company that sells subscriptions to households and advertising to
firms seeking to reach households. A critical point of distinction from the pure-
transactions situation discussed above is that the platform’s unit sales to the two sides of
the market need not be equal to one another (i.e. it may be the case that 𝑥𝑥𝐴𝐴 ≠ 𝑥𝑥𝐵𝐵 .
Although they need not be equal, the unit sales on the two sides of the market will affect
one another when there are cross-platform network effects. It is thus necessary to account
for the fact that an increase in sales on one side of the platform generates costs and
benefits on the other side of the platform.
Behringer and Filistrucchi (2015) consider a monopolist facing demand 𝑥𝑥𝐵𝐵 =
𝑥𝑥𝐵𝐵 (𝑥𝑥𝐴𝐴 , 𝑝𝑝𝐵𝐵 ). In the presence of positive cross-network effects, an increase in 𝑥𝑥𝐴𝐴 leads to
increased demand by side B, holding the price charged to side B constant. Behringer and
Filistrucchi propose a two-sided test under which a necessary but not sufficient condition
for finding predatory pricing is that at least one of the following amounts is negative:
𝜕𝜕𝑥𝑥𝐵𝐵
(𝑝𝑝𝐴𝐴 − 𝑐𝑐𝐴𝐴 ) + (𝑝𝑝𝐵𝐵 − 𝑐𝑐𝐵𝐵 )
𝜕𝜕𝑥𝑥𝐴𝐴
and
(𝑝𝑝𝐴𝐴 − 𝑐𝑐𝐴𝐴 ) + (𝑝𝑝𝐵𝐵 − 𝑐𝑐𝐵𝐵 ).
There are several points worth noting about this test. First, as in traditional markets, the
Areeda-Turner rule lacks a tight linkage to welfare. Even using Behringer and
Filistrucchi’s formulas to determine whether prices are above or below costs, there can be
above-cost pricing that lowers welfare by weakening rivals and below-cost pricing that
raises welfare.
Second, these formulas can be interpreted in ways that implement the no-economic sense
test of predation. However, one must be careful about the calculation of the margin and
demand terms in these formulas in order to ensure that one does not count as benefits any
gains that the platform might obtain by reducing the number of users on the other
platform or by inducing that platform to raise its prices.
In order to understand the need for caution with respect to the demand terms, 𝜕𝜕𝑥𝑥𝐵𝐵 ⁄𝜕𝜕𝑥𝑥𝐴𝐴
and 𝜕𝜕𝑥𝑥𝐴𝐴 ⁄𝜕𝜕𝑥𝑥𝐵𝐵 above, it is helpful to expand the notation slightly. Label the platform under
scrutiny by i and a rival platform by –i. Using notation that accounts for the presence of
the competing platform, the demand faced by platform i can be expressed as 𝑥𝑥𝐵𝐵𝑖𝑖 =
𝑥𝑥𝐵𝐵𝑖𝑖 (𝑥𝑥𝐴𝐴𝑖𝑖 , 𝑥𝑥𝐴𝐴−𝑖𝑖 , 𝑝𝑝𝐵𝐵𝑖𝑖 , 𝑝𝑝𝐵𝐵−𝑖𝑖 ). One would expect group-B users’ demand for platform i to fall as

either the rival’s price falls or its group-A user base rises. The demand of users on the
other side of the platform can be defined similarly. The no-economic-sense logic implies
that the appropriate value of 𝜕𝜕𝑥𝑥𝐵𝐵 ⁄𝜕𝜕𝑥𝑥𝐴𝐴 to use for platform i in the pricing formula above
is 𝜕𝜕𝑥𝑥𝐵𝐵𝑖𝑖 ⁄𝜕𝜕𝑥𝑥𝐴𝐴𝑖𝑖 because this term does not represent any weakening of the rival.
It is important to recognise that one cannot estimate 𝜕𝜕𝑥𝑥𝐵𝐵𝑖𝑖 ⁄𝜕𝜕𝑥𝑥𝐴𝐴𝑖𝑖 simply by looking at how
sales to group-B users rise when the platform lowers its price to group-A users and the
number of group-A users rises in response. The reason is that the price change will also
affect the number of group-A users on platform –i. Specifically, by making platform i
more attractive to side-A users, lowering 𝑝𝑝𝐴𝐴𝑖𝑖 will raise 𝑥𝑥𝐴𝐴𝑖𝑖 and lower 𝑥𝑥𝐴𝐴−𝑖𝑖 . Both of these
changes in the numbers of users will raise 𝑥𝑥𝐵𝐵𝑖𝑖 , but only the first effect should be counted
under a no-economic-sense standard; the latter constitutes a weakening of the rival. 28
Another way to see this point is to consider a situation in which there are multiple cohorts
of users over time. As discussed above, a network might charge lower prices to early
cohorts in order to: (a) build up its own installed base to offer greater network benefits to
later cohorts of users, and/or (b) prevent rivals from becoming stronger future competitors
by building up their own installed bases. Adopting a multi-sided perspective, one might
be tempted to take both types of benefits into account because the core of the approach is
to account for the platform’s gains and losses associated with all users (here, different
cohorts), rather than focusing on one group in isolation. But notice that, the more
successful the firm is in weakening rivals (and, thus, generating future sales), the more
this form of the test indicates that the firm is not engaged in predation. Intuitively, this
form of the price-cost test mistakenly treats recoupment as covering costs.
In addition to the demand terms, the price-cost margins must also be interpreted with
care. In some circumstances, charging lower prices to the A side of a market may weaken
competition on the B side and, thus, allow the platform to charge higher prices to B-side
users. Critically, in these circumstances, the higher prices are due to the loss of
competition rather than an increase in cross-platform network effects. A naive test would
count the elevated prices as offsets to the predatory prices rather than recognising them as
a form of recoupment occurring at the same time as the predatory pricing.
A recent case brought by the United Kingdom’s Director General of Fair Trading
illustrates this issue. 29 Napp Pharmaceutical Holdings Limited and subsidiaries sold oral
sustained-release morphine to two market segments: hospital (i.e. patients in hospital) and
community (i.e. patients under the care of a general practitioner). The Director found that,
due to switching costs and reputational effects, purchase decisions of the community
segment were strongly influenced by purchase decisions of the hospital segment. This
influence gave rise to form of cross-platform network effect: all else equal, greater
hospital sales could be expected to lead to greater community sales. Moreover, a supplier
lacking substantial hospital sales would have difficulty effectively competing in the
community segment.
The Director found, in part, that Napp charged predatory, below-cost prices to the
hospital segment in order to prevent entry and weaken competition in the community
segment. In its defense, Napp argued that its prices to the hospital segment were not
predatory because they generated profitable sales in the community segment. Letting A
denote the hospital segment and B the community segment, Napp’s argument can be
stated in terms of the formulas above. Napp’s position was that, even if (𝑝𝑝 𝐴𝐴 − 𝑐𝑐𝐴𝐴 ) < 0,
the prices were justified because

(𝑝𝑝𝐴𝐴 − 𝑐𝑐𝐴𝐴 ) + (𝑝𝑝𝐵𝐵 − 𝑐𝑐𝐵𝐵 ) > 0.
The Director argued -and the Competition Appeal Tribunal agreed- that Napp earned
“high compensating margins in the community segment... precisely because its discount
policy in the hospital segment has hindered competition in the community segment.” 30
The Tribunal explained that: 31
the fact that Napp’s below-cost pricing in the hospital sector enables it to make
money from ‘follow-on’ sales in the community sector merely signifies that the
particular form of ‘recoupment’ available to Napp is more direct and more
immediate than it is in other cases of predatory pricing.
Stated algebraically, the Tribunal found that the term (𝑝𝑝𝐵𝐵 − 𝑐𝑐𝐵𝐵 )𝜕𝜕𝑥𝑥𝐵𝐵 , particularly the size
of the margin (𝑝𝑝𝐵𝐵 − 𝑐𝑐𝐵𝐵 ), represented successful recoupment and could not be used to
justify the fact that (𝑝𝑝𝐴𝐴 − 𝑐𝑐𝐴𝐴 ) < 0.
Some readers might assert that Napp is not a platform because it does not facilitate
interactions between the two sides. But whatever label one attaches to it, the logical
structure of the analysis is identical to that of a two-sided market. Moreover, this type of
effect could arise in settings that are widely agreed to constitute multi-sided markets
when platforms have sufficiently different characteristics from one another that the price
structure affects the ability of some firms to compete. For example, competing media
platforms may have very different business models (e.g. subscriber versus advertising-
supported business models), and a dominant firm might deviate from its otherwise
optimal business model (say by giving away subscriptions rather than charging for them)
precisely to harm rival platforms relying on different business models. 32
Recoupment as a test of exclusionary behaviour

Successfully detecting predation and distinguishing it from beneficial competition is
extremely difficult, particularly in markets with network effects. The discussion above
suggests that the relying on price-cost tests alone is unlikely to produce reliable results.
The economics of network effects indicates that observing two-sided prices below
marginal or average variable cost very likely tells us little when platforms are in a growth
stage. Moreover, as discussed in the context of Napp, by itself a price-cost test may fail to
detect what many would consider to be successful predatory pricing. Can a recoupment
test help overcome these difficulties?
Some commentators view the question of whether a firm can recoup the losses suffered
from below-cost prices as a test of whether predation is rational. Under this view, one
asks the following question: Given that one sees the firm pricing below cost in the short
run, will its profits be higher in the long run because of the lower short-run prices? A
fundamental problem with this view is that, in this form, the recoupment prong is a test
that any economically rational investment -predatory or otherwise- would have to meet.
Hence, if one observes that a firm is pricing below cost and is expected to recoup its
investment in below-cost pricing, the only conclusion that one can reasonably draw from
these facts alone is that the firm is economically rational. This naive form of the
recoupment test fails to distinguish rational predation from rational competition on the
merits. The problem with the naive test is that it does not address differences in the
mechanisms by which an investment in below-cost pricing might be recouped.

The logic of the no-economic-sense test does address such differences, and it indicates
that a pair of different questions should be posed with respect to recoupment: Is below-
cost pricing profitable for the platform because it makes the platform a stronger
competitor by building up its user base? Or is the below-cost pricing profitable only
because it also weakens competition by preventing rivals from building their own user
bases?
In answering these questions, it is important to recognise that, in the presence of network
effects, exclusionary behaviour can significantly harm competition and consumer welfare
without driving competitors from the market. As illustrated by in the Napp case,
weakening a rival can allow a dominant firm to charge higher prices and earn greater
profits even if the rival is not driven from the market entirely. 33 One might argue that
having a bright-line test based on exit would be useful because it provides greater
certainty and is easier to apply. However, the use of a bright line also raises the
possibility of gaming: a platform engaging in exclusion may seek to weaken its rivals just
up to the point that they are about to exit, while rivals might exit in order to trigger the
possibility of receiving damages that would be unavailable to them if they remained in
business.
It can be very challenging to determine whether below-cost pricing is profitable only
because it also weakens competition by preventing rivals from building their own user
bases. To do so, one might have to determine whether the firm’s conduct would be
profitable in a counterfactual world in which competitors were not weakened (i.e. that
rivals could continue to offer the same surplus that they otherwise would have). In the
presence of inter-temporal network effects, it becomes necessary to project the future
industry equilibrium in order to apply the test. Doing so can be very difficult given role of
consumer expectations and potentially complex business strategies.
Economists frequently assert that effects -rather than intentions- are what matter for
welfare and, thus, intentions are irrelevant. However, if one expects business people to
know what they are doing, then their views (expressed in ordinary-course-of-business
documents) may shed light on facts that are otherwise hard for an outsider to observe (e.g.
whether particular conduct made economic sense for non-exclusionary reasons). Of
course, there are issues relevant for competition policy that executives may be unqualified
to analyse, and there is a risk that companies will create documents solely with potential
litigation in mind. Hence, evidence of intention alone is insufficient to establish
anticompetitive effect or its absence. But neither is such evidence entirely uninformative.
As a general matter, it may be easier to determine when to find that a firm is not liable.
For example, it may be possible to rule out predatory pricing when it is clear that there
could have been little prospect of significantly weakening rivals (e.g. when rivals have
ready access to capital, the costs of multi-homing are low, and users are not locked-in to a
platform as the result of platform-specific investments or the inability of users to
co-ordinate on switching to another platform if it would benefit them collectively).
It is useful to discuss these issues in the context of an example. The following discussion
takes at face value certain claims made by the Initiative for a Competitive Online
Marketplace (ICOMP), an organisation funded by Microsoft. 34 According to ICOMP,
Google France neither charged map users (either consumers or the users of Google’s map
API) nor sold advertising. 35 Hence, at least according to ICOMP, the issue was not that
Google was pursuing a misunderstood two-sided market strategy. Instead, Google was
allegedly engaged in predation whereby, in the short run, it charged zero prices to both
sides of the platform and, in the long run, it would raise prices to both sides once it had

weakened or eliminated competition. This is what is known as a “deep pockets” theory of

harm: Google had greater financial resources than its rivals and could outlast them in a
war of attrition.
If these were the facts, then Google would fail the static version of the two-sided Areeda-
Turner test described above. However, even accepting these claims regarding pricing as
facts, it is not evident that such behaviour is predatory under the no-economic-sense test
once one takes into account inter-temporal considerations. Under the no-economic sense
test, it is necessary to determine whether zero pricing would make sense as an investment
in building an installed base even if it did not weaken Google’s rivals. 36 It is important to
observe that the potential error can run in either direction: predatory pricing could
mistakenly be identified as an innocent investment in future sales, and below-cost pricing
to enhance installed base for innocent reasons could be misdiagnosed as predatory
pricing.
In the appellate decision regarding a case against Google France brought by a rival map
application provider, the court accepted that data for 2007-2009 were not available but
that Google might have failed to cover its costs. 37 However, the court reasoned that
Google must not have engaged in predation because market conditions were such that
Google had no chance of recoupment through the mechanism of driving rivals from the
market. 38
One price or two?

Although looking solely at one-sided prices and margins in isolation can be misleading,
so too can looking at a single, net two-sided price. In thinking about price-cost tests,
recoupment, or whether conduct makes economic sense, one should take a
comprehensive, multi-sided view of revenues and costs. But there is a tendency among
some commentators to do so by focusing solely on net, two-sided prices while ignoring
the underlying price structure. 39 Doing so ignores the critical lesson of the research
literature that, in multi-sided markets, the price structure, as well as the price levels,
matter for competition and welfare. Looking solely at a single, net two-sided price is
generally insufficient for assessing predation. First, any attempt to define a single, net
two-sided price that is compared to a single measure of cost will fail to yield the same
answer as Behringer and Filistrucchi’s (2015) two-part price-cost test in at least some
circumstances. And attempts to utilise a single measure of price become even more
strained when platforms charge their users both subscription and transaction fees. Second,
focusing purely on the net, two-sided prices can miss predation by mistaking recoupment
for two-sided pricing.
4. Creating barriers to multi-homing
This section examines the treatment of exclusivity strategies with which a platform with
substantial market power seeks to weaken competition by demanding that some or all
user groups refrain from patronising competing platforms.
There are several different means by which a platform might limit multi-homing. The
most direct means is the imposition of contractual terms that prohibit a user from
participating on a platform if the user participates on any competing platform. 40
Exclusivity can also be indirectly induced by utilising price structures that make it
economically unattractive for a platform user to multi-home. Examples include quantity
discounts (such as volume-insensitive, or lump-sum, charges for platform use), as well as

discounts based on the percentage of a users’ patronage that is over a given platform (so-
called loyalty discounts). 41 Technological choices can also influence the cost of multi-
homing. For instance, a video game console manufacturer might adopt technical
standards that make it more costly for games created for one console to be ported to a
different brand of console. 42 Lastly, Hermalin and Katz (2006) show that the equilibrium
extent of multi-homing can be affected by the allocation of the authority to choose the
platform over which a transaction takes place when a pair of users on the two sides of the
market are on multiple platforms in common. Specifically, the side that lacks formal
authority may single home in order to force the hand of the side with formal authority.
As Lee (2013) points out, in order to understand the effects of imposing multi-homing
restrictions on users on one side of a platform, it is necessary to account for the reactions
of users on the other side of the platform. A reduction in multi-homing by users on one
side might lead to greater multi-homing by users on another. For example, if video game
developers are blocked from simultaneously offering their games on multiple brands of
video game console, then some gamers may respond by purchasing multiple brands of
consoles.
Before considering the effects of platform exclusivity, several leading theories of harm to
competition that have been developed in non-platform settings are reviewed. The
application of these theories to platforms and the implications for policy enforcement are
then discussed.
(Non-platform) theories of exclusionary exclusivity

Exclusivity requirements have received considerable attention outside the context of
platforms operating in multi-sided markets. In a typical exclusive dealing case, for
instance, a plaintiff alleges that a manufacturer possesses substantial market power and -
because of some asymmetry relative to other manufacturers- benefits when dealers are
forced to choose between distributing that manufacturer’s products alone or distributing
those of all other manufacturers. 43 For example, the U.S. Department of Justice applied a
no-economic sense test and alleged that Dentsply International, Inc. (Dentsply) had
violated antitrust laws by refusing to sell its Trubyte brand of artificial teeth to dealers
that carried certain lines of competing artificial teeth. 44
Judge Robert Bork, among others, argued that exclusivity provisions must be efficient
because otherwise a party seeking exclusivity would not find it profitable to compensate
the parties from which it seeks agreement to be exclusive. 45 The fundamental flaw in this
argument is that it implicitly assumes there is frictionless, efficient bargaining among all
parties affected by the exclusivity agreement -an assumption that is unlikely to be
satisfied in practice. There are two broad ways in which the nature of actual negotiations
undermines Bork’s argument.
First, there often are contractual externalities, whereby the welfare of parties that do not
participate in the bargaining over exclusivity are affected by the outcome of the
bargaining. For example, consumer interests may not be fully represented when a
manufacturer bargains with dealers regarding exclusivity. Similarly, the interests of firms
that might later enter the market as manufacturers typically are not represented when an
incumbent manufacturer bargains with dealers. 46 Moreover, there can be contractual
externalities among dealers. For example, when dealers neither co-ordinate among
themselves nor can easily co-ordinate with alternative manufacturers, any given dealer
may reason that, because its decision with regard to exclusivity will not affect any
potential manufacturer’s decision whether to enter the industry, the dealer may as well

accept a proposal that harms dealers collectively even if that dealer receives very little
compensation for doing so. 47,48 As long as no one buyer is large enough to allow an
entrant to achieve a viable scale, a similar pattern can hold with respect to buyers
agreeing to exclusive relationships with an incumbent seller.
The second way Bork’s pay-for-exclusivity argument breaks down is more subtle.
Calzolari and Denicolò (2015) demonstrate that, even without contractual externalities, it
may be possible to attain exclusivity at no cost. Specifically, they analyse the
consequences of the fact that sellers typically face heterogeneous buyers and are unable to
engage in perfect price discrimination, so that, even under monopoly pricing, all but the
marginal buyers typically earn strictly positive surplus, or information rents. Calzolari
and Denicolò (2015, p. 3332) show that there is a sense in which this surplus can be used
as payment to buyers for agreeing to be exclusive. Because buyers would have received
this surplus in the form of information rents absent exclusivity, the exclusivity is
purchased by the seller at no cost. 49
Of course, the absence of a general proof that exclusive dealing is efficient does not prove
that exclusive dealing harms competition. There are, however, several theories under
which exclusive dealing can harm competition and consumers. All of these theories rely
on the existence of some asymmetry among manufacturers, but the nature of those
asymmetries, and the mechanisms by which competition is harmed, are very different.
The first two theories of harm are based on the assumptions that a manufacturer’s profits
are an increasing function of its rivals’ costs and that exclusivity arrangements can serve
as a means of raising those costs. The core difference between these two theories is
source of asymmetry among firms and the role of long-term contracts. The first theory
relies on temporal asymmetries. Specifically, it applies to situations in which an
incumbent supplier can “tie up” dealers or other trading partners (e.g. buyers) before a
competing supplier is able to enter the market. The supplier induces the other parties to
agree to long-term, exclusive contracts such that, if a competing supplier later entered the
market, it would be unable to trade with the parties under contract. If the contracts have
staggered expiration/renewal dates, then there will be no date on which an entrant could
freely compete for all potential trading partners. In the presence of economies of scale,
the entrant’s resulting level of activity might be too small to be economically viable even
if some trading partners remained available.50
The second theory of harm is also based on the assumption that a manufacturer benefits
from increases in its rivals’ costs. If there are economies of scale and scope in
distribution, then a system of exclusive dealers will raise the distribution costs of all
manufacturers but will do so more for smaller ones than larger ones. The net effect may
be to raise the profits of the largest manufacturer, even though its costs of distribution are
raised. 51 Hence, if there is some source of asymmetry that results in one manufacturer’s
having much larger sales than others, then that manufacturer can have incentives to seek
exclusivity. Notice that contracts do not play a commitment role under this theory -
dealers can be free to switch to other manufacturers. The relevant asymmetry is with
regard to the manufacturers’ sizes (and thus their abilities to generate sales to support
exclusive dealer networks) rather than the order in which they enter into contractual
negotiations with dealers.
The third theory is not based on raising rivals’ costs through the denial of scale. Calzolari
and Denicolò (2015) examine competition between duopolists offering differentiated
products, where one of the firms -the “dominant” supplier- has a cost or vertical quality
advantage. Because products are differentiated and buyers have a taste for variety, the

higher-cost firm can still compete for sales at the margin if buyers are able to patronise
both sellers simultaneously. As Calzolari and Denicolò (2015, p. 3322) explain, this fact
can create an incentive to impose exclusivity 52:
[If] exclusive contracts are banned, firms are forced to compete for each
marginal unit of a buyer’s demand. Excluding rivals thus requires a limit pricing
strategy, which in turn entails a sacrifice of profits. When exclusive contracts are
permitted, on the other hand, firms compete for the entire volume demanded by a
buyer—i.e., competition is in “utility space.” In utility space, the dominant firm
can exclude rivals by leveraging on the information rents left on inframarginal
units. If the competitive advantage is large, the dominant firm can keep charging
monopoly prices and exclude rivals by means of exclusivity clauses only. If the
competitive advantage is more limited, exclusive prices cannot be set at the
monopoly level, but the discount required to foreclose is smaller than it would be
in the absence of exclusive contracts. [Emphasis added, internal footnote
omitted.]
It is widely recognised that, in addition to harming competition, exclusive arrangements
can also create a new dimension of competition: competition for exclusivity. Moreover,
Calzolari and Denicolò identify a specific mechanism through which exclusivity can
strengthen, rather than weaken completion overall. As Calzolari and Denicolò (2015, p.
3323) explain:
Whereas product differentiation softens competition for marginal units, it does
not soften competition in utility space. In utility space, product diversity is in fact
irrelevant: all that counts is the amount of rent left to buyers. When firms [have
comparable cost or vertical quality levels], this tends to make competition in
utility space tougher than competition for marginal units.
Thus, when the suppliers are differentiated but have relatively similar costs or (vertical)
quality levels, the effect of exclusivity can be to intensify competition by switching it
from differentiated competition for marginal units to undifferentiated competition in
utility space.
Applicability to platforms
Several features of platform markets make them susceptible to the use of exclusive
agreements to harm competition. First, the cross-platform nature of network effects gives
rise to the possibility of contractual externalities when there is no mechanism for users on
one side of a platform to make financial transfers to users on the other side in order to
influence their choice of platform. Absent such mechanisms, a user on one side of a
platform might have little concern for the effects of a decision to single-home on the
welfare of users on another side of the platform. 53
Second, cross-platform network effects give rise to demand-side economies of scale that
allow a platform to benefit if it can use exclusivity as a means of limiting participation on
rival platforms and, thus, raising rivals’ costs (i.e. weakening their ability to provide user
benefits). Moreover, the provision of multi-sided platform services may be subject to
strong production economies of scale in addition to demand-side economies of scale,
reinforcing these effects. Hence, if there is some initial asymmetry, the leading or
dominant platform may be able to benefit from imposing conditions that drive most users
in one or more groups to single-home on that platform when they would otherwise have
multi-homed. The dominant platform can benefit from increases in its rivals’ average

costs if the higher costs drive the rivals from the market. And -because the rivals will be
weaker competitors- the dominant platform can benefit from increases in its rivals’
marginal costs of generating user benefits even if the rivals remain in the market.
Shapiro (1999, p. 677) presents a dynamic theory of these effects and argues that multi-
homing can serve as a transitional user strategy that facilitates entry by new platforms.
The logic of this argument is that, faced with an all-or-nothing choice between an
emerging platform and an established one, there are conditions under which users will
choose the established platform. However, given the option of multi-homing, some
consumers might do so, allowing the emerging platform to begin to build an installed
base that will then attract further users. By imposing an exclusivity requirement, an
incumbent platform can eliminate this path to entry. Shapiro (1999, pp. 680 and 683) also
argues that exclusivity can lead to pessimistic consumer expectations regarding the
entrant’s prospects, which reinforce this effect. 54
Turning to the sources of asymmetries, platforms may have different production costs,
product attributes, or market entry dates. As a result of these differences, platforms may
differ in terms of their existing installed bases and/or users’ expectations regarding the
number of users who will patronise the platforms in the future. There can also be
feedback effects that reinforce initial asymmetries (e.g. if there are expected to be more
side-A users on a platform, then more side-B users are attracted, which then leads more
side-A users to patronise the platform and starts a new round of feedback). 55
Four legal cases illustrate how the courts have treated platform exclusivity agreements.
These cases also demonstrate that the issues are not new.
The earliest of these cases involved media platforms. The Lorain Journal was the only
daily newspaper in Lorain, Ohio. 56 In 1948, the radio station WEOL began broadcasting
in an area that included the Journal’s subscribers. The Journal demanded that advertisers
single-home (i.e. it refused to sell advertising to any business that purchased advertising
from WEOL). The U.S. Department of Justice alleged (and the Supreme Court agreed)
that this conduct was exclusionary and intended to harm competition by driving WEOL
out of the local market for advertising. This case fits Calzolari and Denicolò’s (2015)
theory. The key asymmetry was that, because of the nature of radio advertising and the
fact that Journal had a much larger audience than did WEOL, advertisers wanted to use
advertising on WEOL only as a supplement to advertising in the Journal. 57 Calzolari and
Denicolò’s theory indicates that the Lorain Journal was able to weaken competition,
which resulted in greater unit sales of advertising by the Journal and higher advertising
prices, to advertisers’ detriment.
The next two cases also build on the idea that, if faced with an all-or-nothing choice,
users will choose to patronise the platform with the largest user base but otherwise would
multi-home. One case involved floral delivery platforms, which create value by bringing
together florists receiving orders for flowers with florists fulfilling orders. Specifically, if
a consumer desires to send flowers to someone in another city, the consumer can place an
order with a local florist that is a member of a floral-delivery platform and that order will
be fulfilled by another platform member that is located near the recipient of the flowers.
In the mid-1950s, FTD was by far the largest such platform in the United States and had a
policy directly prohibiting its member florists from participating in competing floral
platforms. 58 In 1956, the U.S. Department of Justice filed a complaint against FTD
alleging that its exclusive membership restriction eliminated competition and preserved
FTD’s market dominance. FTD and the Department entered into a consent decree
enjoining conduct that had the purpose or effect of imposing exclusivity. 59 In 1995, the

Department alleged that FTD had violated the consent decree by offering financial
rewards to florists that were members of only FTD and that FTD did so in order to
weaken rival platforms’ ability to compete.60 FTD agreed to cease offering the rewards. 61
The case thus illustrates an asymmetry based on florists’ expectations of platform size
and the use of both direct and indirect measures to induce single-homing.
In the late 1980s, the then-leading video game console manufacturer Nintendo used a
direct measure by requiring companies developing games for its Nintendo Entertainment
System console to release those games exclusively on that platform for a period of two
years. Rival console maker Atari sued Nintendo, alleging that this practice harmed
competition and preserved its market position. 62 Although Atari lost the case, Nintendo
ceased the practice before the verdict was reached. 63
Lastly, in 2001, the U.S. Department of Justice successfully argued that the MasterCard
and Visa credit card networks harmed competition by prohibiting certain forms of multi-
homing. 64 MasterCard and Visa both had policies that limited member banks’ abilities to
issue cards on competing credit and charge card platforms, namely American Express and
Discover/NOVUS. Because of asymmetries in coverage and the card products supported
by the platforms, banks were reluctant to forego card issuing on MasterCard and Visa
entirely in order to issue credit and charge cards on American Express and/or
Discover/NOVUS. However, there was evidence that some banks issuing cards on
MasterCard and Visa would be interested is issuing cards on the American Express or
Discover/NOVUS networks if multi-homing were permitted. 65 American Express’s and
Discover/NOVUS’s inability to attract these card-issuing banks weakened platform
competition because the two platforms were less attractive both to cardholders and -on
the other side of the platforms- merchants. After the rules were dropped, several banks
began issuing cards on the American Express and Discover platforms.
In several respects, this case, too, is a good match for Calzolari and Denicolò’s (2015)
theory. At the time, both American Express and Discover/NOVUS were seen more as
niche networks (with American Express supporting cards aimed at high-end consumers
and Discover supporting cards aimed at low-end consumers), while MasterCard and Visa
supported cards aimed at a broad range of consumers. Hence, American Express and
Discover were better positioned to compete for marginal business than compete in utility
space.
Implications for enforcement

The theories described above have several implications for competition policy.
First, a platform seeking exclusive arrangements need not reach them with all -or even
most- potential users for such a policy to harm competition. Exclusivity can be used to
raise rivals’ costs even if there are users that choose to patronise rival platforms: those
users may be too few or may lack the necessary characteristics to allow rivals fully to
realise network effects and production economies of scale. Moreover, the use of exclusive
relationships to eliminate competition at the margin identified by Calzolari and Denicolò
(2015) does not rely on denying rivals scale. Instead, exclusivity is used to shift the nature
of competition to exploit existing asymmetries among competitors. Hence, enforcement
guidelines that focus on the percentage of users that are subject to foreclosure can be
misguided. 66
Second, as is also the case with predatory pricing, exclusivity that significantly raises
rivals’ costs can significantly harm competition even if that conduct does not drive rivals

from the market. Moreover, the mechanism of harm identified by Calzolari and Denicolò
(2015) relies on shifting the nature of competition rather than eliminating competitors. 67
Third, enforcers should be careful not to place undue weight on contract length.
Contractual lock-in is important under a theory of harm in which the asymmetry
facilitating the use of exclusivity is temporal and the incumbent uses long-term, staggered
contracts signed before the entrant is present to make entry more costly. However, the
other theories of harm discussed above do not rely on contracts as commitments and,
thus, contract length is unimportant. Instead there has to be an asymmetry among
suppliers in terms of costs, product quality, user bases, or user expectations. In the U.S at
least, courts have moved away from reliance on contract length. For example, the
Dentsply appellate court focused on “the nature of the relevant market and the established
effectiveness of the restraint” rather than contract length. 68
Fourth, Calzolari and Denicolò (2015, 3345-46) find that, when exclusivity shifts the
market from competition for marginal units to competition for a user’s entire volume, it
can strengthen or weaken competition, depending on the degree of asymmetry between
different suppliers. The authors also indicate that exclusives are less likely to harm
competition when rivals also impose exclusivity (Id.). This logic suggests that, when
platforms are similar and all impose exclusivity, they are doing so for reasons other than
harming competition by weakening some firms’ abilities to compete relative to others’.69
Fifth, as discussed above for non-platform markets, exclusivity can create new avenues of
competition (e.g. competition for exclusivity), which complicates enforcement. This is
also true of platform markets. When users on one side single home and users on the other
do not, the single-homing side chooses the platforms over which interactions will occur.
Hence, platforms engage in price competition to attract users on the single-homing side,
but not users on the multi-homing side. Indeed, each platform has a monopoly for access
to its single-homing users. 70 By contrast, when multi-homing is blocked, platforms will
compete for users on both sides.
Building on this observation, Armstrong and Wright (2007) show that exclusivity
requirements can have very strong implications for the distribution of economic surplus
between two sides of platform users. Inter alia, Armstrong and Wright analyse a model of
competition between two platforms that facilitate interactions between buyers and sellers
in which the authors reach the following findings. Platforms compete solely for buyers
(who single-home) and extract all of the surplus from sellers (who multi-home) when
platforms cannot require sellers to be exclusive. By contrast, platforms compete to attract
sellers to exclusive relationships and extract all of the surplus from buyers when
exclusive contracts are permitted.
The possibility of such dramatic differences in the effects of exclusivity on the welfare of
different user groups raises an important question for competition policy. How should the
shift in surplus be treated? One view is that a user-welfare standard should weigh all users
equally and focus solely on the net effects. An alternative view is that each user group is
entitled to the benefits of competition and that harm to one user group due to harm to
competition cannot be offset by gains to another user group that are a consequence of the
loss of competition. It would be useful to have greater clarity regarding policy objectives.
Although the case did not involve exclusivity, recent litigation between the U.S.
Department of Justice and American Express has brought this issue to the fore. 71 The
Department of Justice argued that American Express’s conduct harmed competition in the
market for credit and charge card acceptance services sold to merchants and that

demonstrating harm to merchants was sufficient to shift the burden to American Express
to show that it had an offsetting, pro-competitive rationale. Although the Department of
Justice prevailed at trial, the appellate court overturned on the grounds that the
government should have proven that the losses suffered by merchants as a result of
American Express’s conduct were not outweighed by gains to American Express’s card
holders. 72
Sixth, as is well known, network effects can give rise to natural monopoly conditions. A
potentially challenging question for competition policy enforcers is whether the greater
realisation of network effects due to the elimination of rival networks and the consequent
coalescing of all users on the same network could be considered to be an efficiencies
defence. For example, Armstrong and Wright (2007) consider a model of competition
between undifferentiated platforms and find that exclusivity can be used to eliminate a
rival. However, exclusion is efficient in their model. More generally, exclusion could also
occur with a small degree of product differentiation, in which case, it could be inefficient
if the loss of differentiation benefits exceeded the costs of multi-homing (which -absent
direct or indirect restraints- could serve as a means of fully realising cross-platform
network effects).
Seventh, traditional types of efficiencies should also be credited, where valid. For
example, translating the leading pro-competitive justification for exclusivity to platforms,
a platform might argue that exclusivity increases its willingness to make investments that
benefit users. Segal and Whinston (2000) find that exclusivity has this effect only if the
platform’s investments raise users’ value of transacting with rival platforms, so that a
commitment from the user is needed to prevent free riding. Thus, a platform would have
to demonstrate that it is investing in its users in ways that raise the value those users
would generate if they were to patronise a rival platform.
Lastly, the lack of an efficiency rationale justifying the imposition of exclusivity can be
informative. In the Dentsply, Lorain Journal, and Visa cases, for example, the defendants
were unable to produce credible efficiency rationales for their challenged conduct.
5. Conclusion
Distinguishing exclusionary from competitive behaviour in multi-sided markets can be

complicated and difficult. Depending on the circumstances, the practices at issue may
raise or lower welfare and may strengthen or weaken competition. This is a reason for
caution in assessing potentially exclusionary conduct. But it is not a reason for giving up
on competition policy enforcement. Although the issues are particularly difficult, there
are also reasons to believe that two-sided markets may be particularly fertile ground for
exclusionary behaviour.

Appendix
The following highly stylised model illustrates why what is ostensibly a total-surplus
standard could, in practice, become a competitor-surplus standard. Suppose the actual
change in total surplus due to certain conduct is: ∆𝑊𝑊 = ∆𝜋𝜋 𝐼𝐼 + ∆𝜋𝜋 𝑅𝑅 + ∆𝑆𝑆, where the three
components of the change in welfare are the change in the incumbent’s profits, the
change in a rival’s profits, and the change in consumer surplus, respectively. In addition,
suppose both the decision-making firm and its rival know all of the values with certainty
but the court observes only ∆𝑊𝑊 + 𝜀𝜀, where 𝜀𝜀 is a random observation error. Let
𝜌𝜌(∆𝑊𝑊) ≡ 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃{∆𝑊𝑊 + 𝜀𝜀 < 0} denote the probability that firm will be found liable.
Now, consider the rival’s incentive to initiate an enforcement action. Suppose that,
conditional on the defendant’s being found guilty, the expected change in the rival’s
profits is equal to 𝛾𝛾∆𝜋𝜋 𝑅𝑅 , where 𝛾𝛾 > 0 is a factor that accounts for both the expected
amount of monetary damages awarded by the court for past harm and the net present
value of not being subject to the defendant’s adverse conduct in the future. Ignoring any
litigation costs, the expected change in the rival’s profits is 𝜌𝜌(∆𝑊𝑊)𝛾𝛾∆𝜋𝜋 𝑅𝑅 .
The rival will bring a complaint if and only the expected benefits are greater than the
costs. Letting L denote the rival’s cost of litigation, it will bring a complaint if and only if
𝜌𝜌(∆𝑊𝑊)𝛾𝛾∆𝜋𝜋 𝑅𝑅 > 𝐿𝐿. This rule is equivalent to bringing a complaint if and only if ∆𝜋𝜋 𝑅𝑅 < 0
and ∆𝑊𝑊 < 𝛿𝛿, for some constant 𝛿𝛿 which may be greater or less than 0, depending on the
values of 𝛾𝛾 and L and the distribution of 𝜀𝜀.
Given this decision rule, the potential defendant has incentives to avoid actions that harm
its rivals -whether through exclusion or competition on the merits. Such an implicit rule is
not entirely bad if there is a positive correlation between the amount of harm to the rival
and the amount of harm to consumers. However, the correlation might well be negative
because stronger competition by one supplier typically will benefit consumers but lower
the profits of a rival supplier. Indeed, the sign of the correlation might be seen as a
measure of whether the harm to rival is the result of competition or exclusion.
Notes
1 This is similar to the definition suggested by Weyl (2010). For a discussion of issues concerning
the definition of multi-sided platforms and markets, see Hermalin and Katz (forthcoming).
2 Given space constraints, this paper does not address issues of market definition and the
assessment of market power, which are often critical in litigation and the determination of whether
the defendant’s conduct can cause material harm. These issues are addressed by other
contributions to this workshop. That said, there is a risk of error when making this separation
because the various issues interact with one another and should be addressed in an integrated
analysis. For example, market definition is not an end in itself, and it should be closely tied to the
specific questions at hand with respect to the conduct at issue.

3 The distinction between the two concepts is not an entirely sharp one. For example, in markets
with learning-by-doing, predatory pricing may raise rivals’ costs by denying them sales that would
have otherwise led to learning and lower costs. Similarly, in markets with network effects,
predatory pricing can result in rival platforms’ having fewer users and—because network benefits
are reduced—higher costs of providing any given level of user benefits.
4 Various forms of this test have been advocated by Steven Salop. (See, e.g., Salop (2006).)
5 For a discussion of other problems, see Melamed (2005) and references therein.
6 For example, the U.S. Supreme Court has stated that: “The mere possession of monopoly power,
and the concomitant charging of monopoly prices, is not only not unlawful; it is an important
element of the free-market system. The opportunity to charge monopoly prices—at least for a
short period—is what attracts “business acumen” in the first place; it induces risk taking that
produces innovation and economic growth. To safeguard the incentive to innovate, the possession
of monopoly power will not be found unlawful unless it is accompanied by an element of
anticompetitive conduct.”[Emphasis in original.] (Verizon Communications Inc. v. Law Offices of
Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004).)
7 See Appendix.
8 This test is generally associated with Judge Richard Posner. (See, e.g., Posner, 2001, pp. 94–95.)
For a particular application of this logic to develop a cost test for predatory pricing, see Baumol
(1996).
9 European Commission (2009), ¶¶ 23 and 67. In assessing predatory pricing, the Commission also
examines whether the alleged predator is engaged in short-run profit sacrifice, a variant of the next
standard for exclusionary behaviour discussed below. (Id., ¶63.)
10 Id., ¶ 24.
11 Id.
12 See, e.g., Werden (2006). Ordover, J. A., and Willig, R. D. (1981) advocate a definition of
predatory behaviour along similar lines but focused on exit rather than considering all degrees of
harm to competition.
13 See, e.g., Brief of the Appellees United States and the State Plaintiffs at 48, United States v.
Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) (Nos. 00-5212, 00-5213); Brief for Appellant
United States at 2, 30, United States v. AMR Corp., 335 F.3d 1109 (10th Cir. 2003) (No. 01-3202)
(public redacted version); Brief for Appellant United States at 28, United States v. Dentsply Int’l,
Inc., 399 F.3d 181 (3d Cir. 2005) (No. 03-4097) (public redacted version).
14 See, e.g., Melamed (2006).
15 Brooke Group, Ltd. v. Brown & Williamson Tobacco Corporation, 509 U.S. 209, 222 (1993).
Many other national competition authorities consider price-cost tests as well. For a survey of
practices, see Unilateral Conduct Working Group (2008), § II.1.
16 Id. at 224.
17 Case C-62/86 AKZO Chemie v Commission, [1991] ECR I-3359; Case C-333/94 P Tetra Pak
International v. Commission [1996] ECR I-5951. The cost concepts are stated for a single-product
firm. For the corresponding multi-product concepts, see European Commission (2009), ¶ 26.
18 Case C-333/94 P Tetra Pak International v Commission, [1996] ECR I-5951; Case C-202/07 P
France Télécom SA v Commission of the European Communities, [2009] ECJ First Chamber.

19 Unilateral Conduct Working Group (2008), § II.2.A and B. The treatment of recoupment varies
among national competition authorities within the European Union, as well as among the
authorities of other nations. For a survey of individual countries’ practices, see id., § II.2.
20 European Commission (2009), ¶¶ 20 and 68-71.
21 Areeda and Turner (1975).
22 For a discussion of the debate, see Elhauge (2003).
23 Although many commentators prefer to focus on two-sided platform issues, the use of the
freemium model appears to have played a central role in a recent case brought against Google
regarding the pricing of its mapping application. (Bottin Cartographes v. Google France, Cour
d’appel, Paris Pôle 5, Chamber 4, 25 November 2015.)
24 For an early formal model of network competition with below-cost pricing, see Katz and Shapiro
(1986).
25 Similar issues arise with learning by doing. See Cabral and Riordan (1994 and 1997).
26 Vasconcelos (2015) extends some of Farrell and Katz’s (2005) results to platforms with one- and
two-sided cross-platform network effects.
27 See, e.g., Wright (2004).
28 Algebraically, the change in 𝑥𝑥𝐵𝐵𝑖𝑖 equals (𝜕𝜕𝑥𝑥𝐵𝐵𝑖𝑖 ⁄𝜕𝜕𝑥𝑥𝐴𝐴𝑖𝑖 )(𝑑𝑑𝑥𝑥𝐴𝐴𝑖𝑖 ⁄𝑑𝑑𝑝𝑝𝐴𝐴𝑖𝑖 ) + (𝜕𝜕𝑥𝑥𝐵𝐵𝑖𝑖 ⁄𝜕𝜕𝑥𝑥𝐴𝐴−𝑖𝑖 )(𝑑𝑑𝑥𝑥𝐴𝐴−𝑖𝑖 ⁄𝑑𝑑𝑝𝑝𝐴𝐴𝑖𝑖 ). The
incorrect approach described in the text amounts to assuming that the observed change in 𝑥𝑥𝐵𝐵𝑖𝑖
equals (𝜕𝜕𝑥𝑥𝐵𝐵𝑖𝑖 ⁄𝜕𝜕𝑥𝑥𝐴𝐴𝑖𝑖 )(𝑑𝑑𝑥𝑥𝐴𝐴𝑖𝑖 ⁄𝑑𝑑𝑝𝑝𝐴𝐴𝑖𝑖 ). This approach would thus credit the effects of weakening the rival
as benefits realised due to competition on the merits.
29 This summary of this matter is based on Case 1001/1/1/01 Napp Pharmaceutical Holdings Limited
and Subsidiaries v Director General of Fair Trading [2002] CAT 1.
30 Id., ¶ 51.
31 Id., ¶ 261.
32 Hoernig (2007) examines the potential for a mobile telecommunications provider to use a high
differential between off-net and on-net prices to harm competition among asymmetric providers.
33 See, also, European Commission (2009), ¶ 69.
34 No representations are being made here regarding the veracity of ICOMP’s factual claims.
35 Initiative for a Competitive Online Marketplace (Undated), p. 10.
36 There also was an issue whether the free version served as a promotional tool to induce map users
to purchase a paid service. This is not a two-sided issue.
37 Bottin Cartographes v. Google France, Cour d’appel, Paris Pôle 5, Chamber 4, 25 November
2015, p. 8.
38 Id., pp. 8-9. Recall that, as a general matter, exclusionary conduct that weakens but does not
eliminate rivals can also harm competition and consumers.
39 Using the notation introduced earlier in the text, these commentators would assert that it would
sufficient to compare 𝑝𝑝𝐴𝐴 + 𝑝𝑝𝐵𝐵 with 𝑐𝑐𝐴𝐴 + 𝑐𝑐𝐵𝐵 to answer any relevant questions regarding market
power, profitability, or harm to competition, without regard to the values of the individual prices
the make up the sum.

40 Lee (2013) notes that, in some industries, a platform can impose exclusivity by vertically
integrating into one side of the market. For example, video game consoles are platforms that bring
together game developers and gamers. An established strategy for console manufacturers is to
integrate into the development of games that are offered exclusively on their platforms.
41 For an analysis of loyalty discounts in “traditional” markets, see Calzolari and Denicolò (2013)
and Klein and Lerner (2016). The earlier paper demonstrates that, under some conditions, market-
share discounts and exclusivity requirements can have very different competitive effects from one
another.
42 In many settings, blocking multi-homing is not the same as blocking platform compatibility. With
compatible platforms, there is a single “network,” and users on side A of one platform benefit
from actions taken by another platform to increase the number of users on its B side. Such effects
need not arise with incompatible platforms even when there is no prohibition on multi-homing and
the act of multi-homing is costless. That said, there are similarities in that a dominant network can
have incentives to oppose compatibility in order to weaken rivals. For an insightful early analysis,
see Cremer et al. (2000).
43 Framed in terms of platforms, one could argue that a manufacturer is a platform that facilitates
transactions between dealers and consumers. This view is counterintuitive but it speaks to the lack
of agreement regarding what constitutes a platform. It is perhaps more intuitive to think of dealers
as platforms and a manufacturer as a platform user which is demanding that other potential users
be excluded.
44 Brief for the United States, Redacted -- Public Version, United States v. Dentsply International,
Inc., p. 18.
45 Bork (1978, p. 309). For an excellent survey of the literature responding to this argument, see Rey
and Tirole (2007, § 4).
46 Aghion and Bolton (1987) demonstrate that, by signing a long-term exclusive dealing agreement
with penalty clauses, a dealer and incumbent manufacturer can force a manufacturer that later
enters the market to compensate the dealer for breaking the long-term agreement. In this way, the
dealer and incumbent manufacturer can appropriate some of the benefits of entry for themselves,
which can reduce entry and harm consumers as well as the potential entrant.
47 This common intuition is summarised in Katz (1989, p. 708). It is formalised and more fully
explored by Rasmussen et al. (1991). Segal and Whinston (2000) correct certain inconsistencies in
Rasmussen et al.’s analysis.
48 Strikingly, as pointed out by Rasmussen et al. (1991, p. 1143), a manufacturer need not have
market power prior to the imposition of exclusive dealing in order to be able profitably to sign
most or all dealers to exclusive contracts. This finding indicates that, in applying a market-power
threshold to screen potential cases, competition policy enforcers should assess what the degree of
market power is when exclusivity is in place.
49 This form of exclusion need not entail any sacrifice of profits. Hence, tests based on evidence of
profit sacrifice could fail to detect this type of harm to competition.
50 In this form of the theory, exclusivity is used to deter entry. As noted above, Aghion and Bolton
(1987) show that exclusive contracts can also be used to extract rents from entrants rather than
deter entry entirely.
51 Katz and Rosen (1985) and Seade (1985) showed that when marginal costs are increased by some
action, even a symmetric (across all manufacturers) cost increase may raise a manufacturer's
profits.

52 In Calzolari and Denicolò’s model, the dominant firm offers both exclusive and non-exclusive
pricing terms. However, their model can be extended to situations in which the seller must choose
one form of pricing or the other.
53 As Rochet and Tirole (2006 , p. 646) observed, this is an important difference between multi-sided
platforms and the sale of complementary goods: unlike the case of buyers who purchase
complementary goods (or “systems”), the decision makers on the different sides of a platform
generally are not concerned with one another’s welfare.
54 Shapiro (1999) provides a verbal analysis for generic network effects. Doganoglu and Wright
(2010) further explore the effects of exclusivity on entry in a formal model that explicitly
examines two-sided markets.
55 These asymmetries need not always favor the incumbent. Shapiro (1999, p. 682) observes that an
entrant with a sufficiently superior technology might wish to impose exclusivity to hasten users’
switching to it. In other words, a technological asymmetry favoring the entrant might outweigh a
temporal asymmetry favoring the incumbent.
56 This case description is based on Lorain Journal Co. v. United States, 342 U.S. 143 (1951).
57 For a range of alternative interpretations, see Lopatka and Kleit (1995).
58 This case description is based on United States v. FTD Corp.; Florists’ Transworld Delivery, Inc.;
FTD Ass’n, Supplemental to Civil Action No. 56-15748, Memorandum of the United States in
Support of Proposed Enforcement Order, July 1, 1995.
59 United States v. Florist’s Telegraph Delivery Ass’n, 1956 Trade Cas. (CCH) ¶ 68,367 (E,D, Mich.
1956).
60 United States v. FTD Corp., 60 Fed. Re. 40,859 (E.D. Mich. 1995).
61 Shapiro (1999, p. 677).
62 Atari Corp. V Nintendo, No. 89-0824 (N.D.Cal. 1992); Atari Games Corp. and Tengen, Inc. v.
Nintendo of America Inc. and Nintendo Co., Ltd., 975 F.2d 832 (Fed. Cir. 1992).
63 Jonathan Weber, “Jury Sides With Nintendo in Suit Brought by Atari: * Verdict: Panel exonerates
the video game giant of trying to monopolise the market and rules it had not damaged its rival.”
Los Angeles Times, May 2, 1992
64 United States v. Visa U.S.A., Inc., 163 F. Supp. 2d 322, 338 (S.D.N.Y. 2001); United
States v. Visa U.S.A., Inc., 344 F.3d 229, 238-39 (2d Cir. 2003). I was retained by the
U.S. Department of Justice as an economic expert in this matter, and I testified at trial.
65 There was also a horizontal element of harm. At the time, MasterCard and Visa were associations
collectively governed by member card-issuing banks, and the policies at issue restricted the means
by which they could compete with one another (i.e. it limited their choices of payment networks
on which to rely).
66 The appellate court in United States v. Microsoft Corp. addressed this issue, noting that U.S.
courts have “taken care to identify the share of the market foreclosed” (United States v. Microsoft
Corp., 253 F.3d 34 (D.C. Cir. 2001) p. 69). While observing that “[b]ecause an exclusive deal
affecting a small fraction of a market clearly cannot have the requisite harmful effect upon
competition, the requirement of a significant degree of foreclosure serves a useful screening
function…” (id.), the court went on to state that, “[a]t the same time, however, we agree with
plaintiffs that a monopolist's use of exclusive contracts, in certain circumstances, may give rise to
a § 2 violation even though the contracts foreclose less than the roughly 40% or 50% share usually
required in order to establish a § 1 violation.” (Id., p. 70.). The economics of network effects

suggests that competition could be harmed by exclusivity involving very substantially less than 40
percent of users.
67 The possibility of using exclusivity to harm platform competition without inducing exit has been
recognised by the U.S. courts. For example, in United States v. Visa U.S.A., Inc., 344 F.3d 229
(2d Cir. 2003), cert. denied, 125 S. Ct. 45 (2004), the defendants were found liable even though
the targets of exclusion were not forced to exit the market.
68 United States v. Dentsply International, Inc., 399 F.3d 181, 184 (3d Cir. 2005).
69 Hermalin and Katz (2013) examine a theoretical model in which exclusivity creates differentiation
that relaxes price competition and benefits all suppliers. The authors find that the welfare effects
are ambiguous when one accounts for investment competition. Lee (2013) conducts an empirical
study of the video game industry and finds evidence that, in that industry for the period he
examined, limitations on multi-homing by video game developers benefited the smaller, entrant
platforms by allowing them to differentiate themselves from the incumbent with the larger
installed base.
70 In telecommunications, this effect is known as the terminating access monopoly problem. For an
early general analysis, see Armstrong (2006).
71 The description of this case is based on United States et al. v. American Express Company,
MasterCard International Inc, Visa, Inc., No. 15-1672 (2d Cir. 2016) reversing 88 F. Supp. 3d 143
(E.D.N.Y. 2015). I was retained in this matter by the U.S. Department of Justice to serve as an
economic expert, and I testified at trial. The U.S. Supreme Court has granted certiorari and will
review this case in its 2017 term.
72 In my opinion, the evidence demonstrated that the harm to merchants and their customers, in fact,
outweighed the gains to American Express card holders.
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6. EXCLUSIONARY PRACTICES AND TWO-SIDED PLATFORMS │ 131
6. Exclusionary practices and two-sided platforms
By Andrea Amelio, Liliane Karlinger and Tommaso Valletti *
1. Introduction
Two-sided platforms refer to situations where (at least) two distinct user groups (i.e. two
demands) interact with each other through a common platform and the participation of at
least one of these groups impact the value of participation for the other group(s).
Following Evans (2003), "a platform constitutes the set of the institutional arrangements
necessary to realise a transaction between two users groups". 1
Typically, these two distinct customer groups cannot contract directly. This is because the
transaction costs for customers individually reaching enforceable agreements are too
high. As a result, a third party usually creates a place or space – a platform – where the
different groups of consumers/users can get together. In such situations, the need to
convince agents to participate on all sides of the platform creates a so-called chicken-and-
egg problem, in that members of each group are willing to participate in the market
insofar as they expect many members from the other side to participate.
For a market to be considered two-sided, it has to do more than just allow two or more
groups "to connect or engage with each other". As expressed by Rochet and Tirole, "if the
analysis just stopped there, pretty much any market would be two-sided, since buyers and
sellers need to be brought together for markets to exists and gains of trade to be
realized." 2 Yet two-sided markets are characterised not only by the existence of cross-side
network effects/indirect network effects, but also by the feature that the platform can use
its fee/pricing structure to influence the volume of transactions between users. Rochet and
Tirole therefore define a two-sided platform as one in which the volume of transactions
between users depends on the structure and not only on the overall level of the fees
charged by the platform.
Multi-sided platforms are very common and are present in many markets including: stock
exchanges, internet portals, payment card systems, newspapers, television broadcasters,
directories, smartphones, mobile and fixed telecommunication networks and estate
agents. These examples cover very diverse industries affecting many different aspects of
consumers' lives. For antitrust authorities it is therefore essential to have a thorough
understanding of these platforms to properly enforce antitrust scrutiny.
*
Tommaso Valletti (Chief Economist, DG COMP and Professor of Economics at Imperial College
Business School), Andrea Amelio (Economist, European Commission) and Liliane Karlinger
(Senior Economist at the Chief Economist Team of the European Commission).

132 │ 6. EXCLUSIONARY PRACTICES AND TWO-SIDED PLATFORMS
Two-sided markets are an area of considerable recent economic research in the field of
Industrial Organization. The paper does not intend to provide an exhaustive review of the
two-sided market literature. The aim of the paper is two-fold. First and foremost, it
focuses on the literature dealing with exclusionary pricing and discusses whether the
presence of indirect network externalities makes platforms more or less prone to adopt
exclusionary conducts. Often, in the public debate, it is advocated that multi-sided
platforms deserve a special (typically, more relaxed) scrutiny by antitrust authorities. 3
The result of our preliminary research is not in line with this conclusion. Similar
exclusionary behaviours taking place in single-sided markets also carry over to multi-
sided markets. This suggests that the typical tools that one applies in the analysis of
single-sided markets need not to be abandoned: it is enough to adapt them. Second, the
paper discusses policy aspects that are particularly relevant in the current discussion
about platform competition and on which more research would be desirable.
The views and comments put forward in this paper are intended to add to the ongoing
debate on platforms and cannot be read as providing guidance on the European
Commission's past or future assessment of competition cases involving multi-sided
platforms. Our contribution has more modest goals and its main purpose is to contribute
with some embryonic research grounded on economic principles to the discussion about
the likelihood of exclusionary practices in multi-sided markets.
2. A close-up on exclusionary pricing in multi-sided platforms
A natural approach when starting to model exclusionary pricing in a multi-sided

framework is to turn to the literature on exclusionary pricing in standard one-sided
markets, to see how they can be adapted to fit the two-sided framework, and to what
extent the results obtained for one-sided markets carry over to the multi-sided framework.
There are many different avenues that one could take, and this article does not attempt to
provide a full treatment of this question.
For instance, we do not consider here the rich literature on predatory pricing which builds
on asymmetric information between incumbent and entrant, and thus explains the
rationality of predation through signalling or reputation building on the side of the better
informed incumbent. These models tend to focus on the informational asymmetry among
the two suppliers, while treating the competitive interaction on the goods market in a
rather reduced-form way. This is why these models do not lend themselves easily to an
adaption to a two-sided context, where the exact nature of competition on either side of
the market is arguably an important feature if one wants to gain further insight beyond
what is known about one-sided markets.
This article therefore zooms in on two important strands of literature regarding
exclusionary strategies which are not driven by asymmetric information, and which are
often associated with the works of Segal and Winston (2000) 4 and Dixit (1980). 5 Segal
and Winston (2000) explore the mechanism of "divide-and-conquer" strategies, whereby
one group of buyers is locked in by the incumbent with very favourable offers, so as to
prevent a potential entrant from reaching critical scale, thus allowing the incumbent to
then monopolise the rest of the market. Dixit (1980) instead belongs to an earlier
literature on entry deterrence through limit pricing, where an incumbent can discourage
entry by setting a price just low enough (or producing an output just high enough) to
render prospective entry unprofitable.

Both model families, "divide-and-conquer" and limit pricing, rely on the presence of scale
economies to achieve foreclosure, but divide-and-conquer strategies require the existence
of multiple buyers who can be played off against each other, while limit pricing models
give a first-mover advantage to the incumbent in making its price (or output) choices in a
way that leaves no room for entrants to establish their business alongside the incumbent
in the market.
This paper builds on these seminal works and adapts these models to incorporate a multi-
sided logic. We study how the presence of externalities, typical of multi-sided platforms,
changes the incentive of an incumbent firm to undertake exclusion.
Extending Segal and Winston (2000) to multi-sided platforms

We start by examining the first strand of literature on "naked exclusion" strategies, which
originates in the works of Rasmusen et al. (1991) 6 and Segal and Whinston (2000).7
While the canonical naked-exclusion models are cast as an analysis of exclusive dealing
contracts, the mechanism they propose can be applied to a wider set of circumstances.
The crucial concept developed in the naked exclusion literature is that of "divide-and-
conquer strategies": Consider an industry where an entrant needs to reach a certain scale
in order to be viable, and there are multiple buyers who choose independently from which
supplier (either the incumbent or the entrant) to buy the product. To fix ideas, suppose
that in order to reach the critical scale, the entrant has to serve the entire market demand.
If the incumbent wishes to thwart entry, it is sufficient to convince just one out of the
many buyers to buy from the incumbent instead of the entrant. A single buyer who turns
away from the entrant prevents the latter from reaching the critical scale, implying that
entry will not take place, i.e. the incumbent remains the only available supplier. All the
other buyers will therefore be forced to buy from the incumbent as well, even if they can
do so only at very high prices.
Of course final buyers are worse off in this monopoly than they would have been in a
duopoly with a more efficient second supplier. But as soon as one buyer turns away from
the entrant, the others no longer have a choice but to buy from the incumbent as well. The
incumbent will therefore only have to compensate the first buyer for giving up the
possibility to buy from the entrant. The compensation paid to the first buyer is thus the
"price" that the incumbent has to pay to monopolise the entire market. This compensation
is paid out of the profits that the incumbent makes from selling at monopoly prices to all
remaining buyers: in this sense, the incumbent's strategy is one of "divide-and-conquer".
This strategy exploits the fact that a single buyer, when deciding from which seller to
buy, only takes into account its own payoff, i.e. it compares the prices and possibly other
terms (e.g. an exclusivity clause in exchange for a certain reward) offered by the two
sellers to this particular buyer, and then chooses whichever offer is more favourable to
itself. However, a single buyer will not typically take into account the consequences its
supplier choice has on the other buyers; in particular, when the buyer decides in favour of
the incumbent and against the entrant, and the entrant fails to reach the critical scale
because of this one buyer, this has a negative impact on all other buyers because it
deprives the latter of a second supplier.
The buyer thus exerts a "negative externality" on all other buyers. Exploiting this negative
externality to its own advantage is at the heart of the exclusionary strategy deployed by
the incumbent in the literature on "naked exclusion". In the following, we will examine
how this concept can be applied to two-sided markets.

Is exclusionary pricing anticompetitive in two-sided markets?

The first paper to introduce naked exclusion pricing strategies into a two-sided market
framework is Vasconcelos (2015). 8 It makes a number of assumptions that distinguish it
from the previous literature on two-sided markets; in particular, the model studies the
case of discrete buyers on each side of the market, as opposed to a continuum of massless
consumers typically assumed in the traditional models of two-sided markets. Allowing
consumers to have positive mass is crucial for the mechanism of "divide-and-conquer"
strategies to work: A single buyer must have a sufficient level of demand to be "pivotal",
i.e. to represent a sufficiently large share in the entrant's total sales so as to be decisive for
whether or not the entrant reaches the critical scale.
The model assumes that there are two groups of agents, labelled i = 1, 2, which interact
with each other via platforms. There is an incumbent platform I which already has an
installed base of buyers on each market side of size 𝛽𝛽 𝐼𝐼 > 0, and an entrant platform E
whose installed base is 𝛽𝛽 𝐸𝐸 = 0, but which has a lower unit cost of serving a user. The
asymmetry in installed bases mirrors the entry barrier in traditional naked exclusion
models, which typically assume some physical setup costs which the incumbent has sunk
already, while the entrant can still avoid them by choosing not to enter the industry.
The two platforms compete for a new generation of buyers of size N on each side, whose
utility from joining platform k = I, E is increasing in the number of (old and new) buyers
who joined the same platform on the other side (i.e. network effects are indirect here).
The key assumption made about network externalities is that they are one-sided: only
group 1 buyers care about the number of buyers on side 2 of the platform they join, while
group 2 buyers are indifferent as to the presence (or absence) of buyers on side 1. 9 The
utility function of the buyers can thus be represented as:
𝑈𝑈1𝑘𝑘 = 𝑧𝑧�𝛽𝛽 𝑘𝑘 + 𝑁𝑁 𝑘𝑘 � − 𝑝𝑝1𝑘𝑘 and 𝑈𝑈2𝑘𝑘 = 𝑟𝑟 − 𝑝𝑝2𝑘𝑘 ,
where r and z are two positive parameters, and 𝑝𝑝𝑖𝑖𝑘𝑘 is the price charged by platform k to an
agent on side i of the market. With one-sided externalities, it is clear that, in this model,
only group 2 buyers will ever be pivotal: by providing the platform they join with a
critical mass N, they "lock in" the group 1 buyers with this platform as well, allowing the
winning platform to charge high pric
The model rules out multi-homing, i.e. each buyer will join either platform 1 or platform
2, but not both. Thus, competition between I and E is of the "winner-takes-all" nature, i.e.
the new generation of buyers will always tip to either one or the other supplier. The old
generation does not buy again, so they are assumed to stay with the incumbent. This
model thus generates two kinds of possible equilibria: one where the incumbent's
platform is the only one, and reaches maximum size 𝛽𝛽 𝐼𝐼 + 𝑁𝑁 on side 2; and another
equilibrium where the entrant serves the new generation of buyers, so that the two
generations of side 2 buyers are split across the two platforms, giving rise to two smaller
networks, the entrant's network of size N, and the incumbent's network of size 𝛽𝛽 𝐼𝐼 .
The model further assumes that platforms can only charge uniform prices on each side of
the market, but different prices across the two sides of the market. Importantly, prices are
allowed to be negative, i.e. the platform can pay agents to join the platform. 10 In the
present setup, the buyer group which will benefit from low prices is group 2, the pivotal
group that is decisive for whether or not entry of a new platform will be feasible.
Clearly, the fact that the entrant can serve buyers at a lower unit cost represents an
important competitive advantage, as this cost differential allows the entrant to make more

aggressive price offers. However, the lack of an installed base proves to be a serious
obstacle when competing against the incumbent: If the entrant wins the new generation of
group 2 buyers, it will still have to compete against the incumbent for group 1 buyers,
because the incumbent's platform has positive value for group 1 buyers thanks to the
presence of the installed base. Thus, the profits that the entrant can recover on side 1 are
capped by the presence of a competitive incumbent.
The same is not true if instead the incumbent manages to attract group 2 buyers. Then, the
entrant's platform is completely worthless to group 1 buyers, so that the incumbent is
effectively a monopolist on this group and can extract monopoly rents from them. The
incumbent can therefore afford to be very aggressive in the fight for group 2 buyers,
because it can expect to recover higher profits on the other side of the market.
The paper shows that exclusion of the entrant can arise for a broad range of parameters,
namely when the cost advantage enjoyed by the entrant is relatively low compared to the
importance of the installed base. However, this does not necessarily imply that exclusion
is inefficient. A reader who is familiar with the literature on naked exclusion may
erroneously conclude that the fact that the entrant can serve buyers at a lower cost than
the incumbent automatically implies that total welfare is maximised when the entrant
serves the buyers, so that any equilibrium in which instead the incumbent prevails is
necessarily inefficient.
However, this conclusion does not necessarily carry over to the case of two-sided
markets. Here, there is an additional effect of entry on total welfare which needs to be
considered, namely the cost of splitting the two generations of group 2 buyers, old and
new, across two different platforms. 11 This is inherently inefficient, because it deprives
the young generation of group 1 buyers of the benefit of the network externality exerted
by the old generation of group 2 buyers, and vice versa.
More specifically, when both generations of group 2 buyers reside on the same platform,
the network benefits enjoyed by any buyer on the other side of the same platform amount
to 𝑧𝑧(𝛽𝛽 𝐼𝐼 + 𝑁𝑁); if all group 1 buyers get to enjoy these network effects (recall that the total
population of group 1 buyers is 𝛽𝛽 𝐼𝐼 + 𝑁𝑁), the total benefit will be 𝑧𝑧(𝛽𝛽 𝐼𝐼 + 𝑁𝑁)(𝛽𝛽 𝐼𝐼 + 𝑁𝑁). If
instead the two generations are fragmented across the two platforms, then the incumbent
platform generates network benefits of 𝑧𝑧(𝛽𝛽 𝐼𝐼 )2 , while the entrant's platform generates
𝑧𝑧𝑧𝑧 2 . This is clearly smaller than the total benefits when both cohorts are on the same
platform, i.e. 𝑧𝑧(𝛽𝛽 𝐼𝐼 + 𝑁𝑁)2 , because the latter also generates network benefits across
cohorts, not just within cohorts.
Under the assumptions of the model, only the incumbent network can generate the full
network effects of 𝑧𝑧(𝛽𝛽 𝐼𝐼 + 𝑁𝑁)2 , while entry necessarily leads to suboptimal network
benefits of 𝑧𝑧(𝛽𝛽 𝐼𝐼 )2 + 𝑧𝑧𝑧𝑧 2 . Overall, this model therefore exhibits an intricate set of
externalities: (i) the network benefits running from side 2 buyers of any platform to its
side 1 buyers, (ii) the network benefits running from the old cohort of the incumbent's
platform to its buyers in the young cohort, and (iii) the "contracting externalities" running
from the new cohort buyers on side 2 to those on side 1, because the side 2 buyers' choice
of platform also determines the available options for side 1 buyers. It is therefore not at
all obvious how these three layers of externalities will play out when the incumbent
engages in divide-and-conquer type of pricing.
The paper shows that when exclusion occurs in this model, it is always socially optimal:
Exclusion will occur when the entrant's cost advantage is not sufficient to outweigh the
benefits from having both generations of buyers concentrated on the same platform; and

this is precisely the condition under which entry is not desirable from a social welfare
point of view either. Moreover, there are equilibria where the entrant prevails but which
are nonetheless inefficient; in other words, this model may exhibit excessive entry.
Two lessons can therefore be learned from this model. The first lesson is that divide-and-
conquer strategies may be successfully used also in two-sided markets. As in a standard
one-sided market, some buyers may not fully internalise the impact their supplier choices
have on the options available to other buyers in the market, and an incumbent may take
advantage of this fact to lock in one part of the market by making very aggressive offers
to the other side of the market, thus preventing potential entrants from gaining a toehold
in the market.
The second lesson is that the impact of exclusion on social welfare might be different in a
two-sided market from a one-sided market. In this particular setup, the existence of an old
cohort of buyers, who are locked in with the incumbent, generates welfare losses if the
new cohort is served by the entrant instead of the incumbent, so that network externalities
are not maximised. Policies such as a ban on below-cost pricing, which are aimed at
preventing inefficient exclusion, may end up favouring inefficient entry instead.
A simple theory of predation

One key feature of the model by Vasconcelos (2015) is that the two platforms compete
simultaneously for both sides of the market. This begs the question what happens if this
assumption is relaxed and instead a sequential setup is considered, whereby the two
platforms first approach one side of the market, and then the other. Exclusionary pricing
under this sequence of moves is studied by Fumagalli and Motta (2013). 12 While their
paper is cast as a general analysis of predatory pricing that applies to one- and two-sided
markets alike, 13 their treatment assumes that the two buyers who are approached
sequentially by the two suppliers belong to the same side of the market, and exert within-
group externalities on each other. The incumbency advantage in this setup is that the
incumbent can provide more network benefits to any single buyer than the entrant, but
provides lower benefits than the entrant when serving both buyers.
In this section, instead, we think of the two buyers as representing the two sides of a
platform, where the first buyer exerts a cross-group externality on the second, but not the
other way round. This is quite a natural and relevant setting in practice. The following
analysis illustrates the main mechanism in the specific context of a media outlet (say a
newspaper) financed by advertisement.
Let there be competition over two possible user groups, the readers and the advertisers.
For simplicity, assume that each group has exactly one user (or that the group has mass
1), so that co-ordination of purchases within a given group is no issue here. Advertisers
care about the number of readers a newspaper has, as more eyeballs imply higher
advertisement impact and hence more profits from any given ad. Readers instead care
about the number of other readers the same newspaper has, for instance because reading
the same newspaper allows readers to engage in an exchange with their friends about the
content. In other words, readers exert a cross-group externality on advertisers, and an
own-group externality on each other.
Assume that there is an incumbent newspaper, called I, with an installed reader base of
size nI. Readers' utility from buying the newspaper is an increasing function of the
newspaper's reader base, 𝑣𝑣𝐼𝐼 (𝑛𝑛𝐼𝐼 ). There is a rival newspaper, called R, which competes
with the incumbent for the new cohort of readers and advertisers. The rival newspaper has

a smaller installed reader base than the incumbent, 𝑛𝑛𝑅𝑅 < 𝑛𝑛𝐼𝐼 , so that its newspaper
currently provides lower utility to readers than the incumbent's, but has the potential to
provide higher utility if it manages to attract the new cohort of readers:
𝑣𝑣𝑅𝑅 (𝑛𝑛𝑅𝑅 ) < 𝑣𝑣𝐼𝐼 (𝑛𝑛𝐼𝐼 ) but 𝑣𝑣𝑅𝑅 (𝑛𝑛𝑅𝑅 + 1) > 𝑣𝑣𝐼𝐼 (𝑛𝑛𝐼𝐼 + 1). (𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 1)
Likewise, as regards advertisers' valuation for the newspapers, denoted 𝑎𝑎𝑖𝑖 (∙), the rival
newspaper, given its current small reader base, provides lower utility than the incumbent,
but is more efficient in providing advertisement benefits, so that advertisers would prefer
the rival newspaper if it managed to attract the new cohort of readers:
𝑎𝑎(𝑛𝑛𝑅𝑅 ) < 𝑎𝑎𝐼𝐼 (𝑛𝑛𝐼𝐼 ) but 𝑎𝑎𝑅𝑅 (𝑛𝑛𝑅𝑅 + 1) > 𝑎𝑎𝐼𝐼 (𝑛𝑛𝐼𝐼 + 1). (𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 2)
Also assume that the network externalities (both own-group and cross-group) increase
with a newspaper's reader base, but at a less-than-proportional rate. In order to simplify
the exposition, while still showing the main insights, we will focus on the special case
where the incumbent newspaper has fully exhausted all network effects, while the rival
newspaper still benefits from additional readers on both sides of its platform. In other
words, the readers' utility from reading the incumbent newspaper, vI, is unaffected by
whether or not the newspaper manages to attract the new cohort of readers of size 1, and
the same is true for advertisers:
𝑣𝑣𝐼𝐼 (𝑛𝑛𝐼𝐼 ) = 𝑣𝑣𝐼𝐼 (𝑛𝑛𝐼𝐼 + 1) and 𝑎𝑎𝐼𝐼 (𝑛𝑛𝐼𝐼 ) = 𝑎𝑎𝐼𝐼 (𝑛𝑛𝐼𝐼 + 1).
This assumption allows us to simplify our notation, by denoting respectively as v and a
the (constant) value to the readers and the advertisers when joining the incumbent
platform. Instead, variables with an overbar refer to the entrant when it manages to attract
the new cohort, while variables with an underbar refer to the opposite case when it fails to
do so. Hence we can restate our initial conditions as:
𝑣𝑣 > 𝑣𝑣 > 𝑣𝑣, (𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 1′ )
𝑎𝑎 > 𝑎𝑎 > 𝑎𝑎. (𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 2′ )
We will also make the simplifying assumption that both the cost of providing an ad, and
of providing the reader access to the newspaper, is zero.
Consider the following sequence of moves: first, the two newspapers compete for the new
cohort of readers by setting a uniform cover price for the newspaper, denoted 𝑝𝑝𝐼𝐼𝑟𝑟 , 𝑝𝑝𝑅𝑅𝑟𝑟 , and
then, they compete for the new cohort of advertisers by setting a uniform price per ad,
denoted 𝑝𝑝𝐼𝐼𝑎𝑎 , 𝑝𝑝𝑅𝑅𝑎𝑎 . 14
We can therefore apply backward induction to analyse which newspaper will prevail.
Clearly, at the second stage, competition for advertisers will depend on the outcome of
the first stage, i.e. whether it was the incumbent or the rival who managed to attract the
new readers. We consider each case in turn.
(2a) If the new cohort of readers bought I's newspaper at stage 1, then I's reader base is of
size 𝑛𝑛𝐼𝐼 + 1, which provides benefits of size a to advertisers, while R's reader base
remains at level 𝑛𝑛𝑅𝑅 , yielding lower benefits of 𝑎𝑎 to advertisers. The advertisers will
compare the net utility they are offered by I, namely 𝑎𝑎 − 𝑝𝑝𝐼𝐼𝑎𝑎 , to the net utility offered by
R, i.e. 𝑎𝑎 − 𝑝𝑝𝑅𝑅𝑎𝑎 , and will place their ads in I's newspaper whenever:
𝑎𝑎 − 𝑝𝑝𝐼𝐼𝑎𝑎 ≥ 𝑎𝑎 − 𝑝𝑝𝑅𝑅𝑎𝑎 .
Given that this is the last stage of the game, the lowest price R will be willing to offer its
advertisers is zero, so that I wins the advertisers with a positive price of

𝑝𝑝𝐼𝐼𝑎𝑎 = 𝑎𝑎 − 𝑎𝑎,
which leaves advertisers with a net utility of 𝑎𝑎 − 𝑝𝑝𝐼𝐼𝑎𝑎 = 𝑎𝑎.
(2b) If instead the new cohort of readers bought R's newspaper at stage 1, so that R has a
large reader base of size 𝑛𝑛𝑅𝑅 + 1 and provides a high utility of 𝑎𝑎 to advertisers, the latter
will prefer I's newspaper whenever:
𝑎𝑎 − 𝑝𝑝𝐼𝐼𝑎𝑎 ≥ 𝑎𝑎 − 𝑝𝑝𝑅𝑅𝑎𝑎 .
In this case, Bertrand competition among I and R will drive I's price offer down to zero,
and R wins the advertisers with a positive price of
𝑝𝑝𝑅𝑅𝑎𝑎 = 𝑎𝑎 − 𝑎𝑎,
which leaves advertisers with a net utility of 𝑎𝑎 − 𝑝𝑝𝑅𝑅𝑎𝑎 = 𝑎𝑎.
Let us now turn to competition for readers in stage 1. Recall that we assumed that readers
are indifferent as to how many advertisers any of the newspapers will attract at stage 2,
i.e. they only care about the newspaper's reader base, and its cover price. Thus, if they opt
for I's newspaper, the latter will have a reader base of size 𝑛𝑛𝐼𝐼 + 1, which provides net
benefits of 𝑣𝑣 − 𝑝𝑝𝐼𝐼𝑟𝑟 to readers; if instead they decide to buy R's newspaper, the latter will
have a reader base is of size 𝑛𝑛𝑅𝑅 + 1, which provides net benefits of 𝑣𝑣 − 𝑝𝑝𝑅𝑅𝑟𝑟 to readers.
Readers thus buy from I whenever:
𝑣𝑣 − 𝑝𝑝𝐼𝐼𝑟𝑟 ≥ 𝑣𝑣 − 𝑝𝑝𝑅𝑅𝑟𝑟 .
To see which of the two newspapers can make the more competitive offer to win the
readers, first note that their aggregate profits over the two periods, when successful in
period 1 (and ignoring discounting across the two periods), are:
Π𝐼𝐼 = 𝑝𝑝𝐼𝐼𝑟𝑟 + 𝑝𝑝𝐼𝐼𝑎𝑎 = 𝑝𝑝𝐼𝐼𝑟𝑟 + 𝑎𝑎 − 𝑎𝑎
Π𝑅𝑅 = 𝑝𝑝𝑅𝑅𝑟𝑟 + 𝑝𝑝𝑅𝑅𝑎𝑎 = 𝑝𝑝𝑅𝑅𝑟𝑟 + 𝑎𝑎 − 𝑎𝑎.
(1a) Consider first the scenario where I wins period 1 competition for readers. Bertrand
style competition between I and R ensures that the lowest price R is willing to offer is the
one that would drive its aggregate profits down to zero:
Π𝑅𝑅 = 0 → 𝑝𝑝𝑅𝑅𝑟𝑟 = −(𝑎𝑎 − 𝑎𝑎).
If I wants to match R's offer to win the readers in period 1, it has to offer:
𝑣𝑣 − 𝑝𝑝𝐼𝐼𝑟𝑟 = 𝑣𝑣 − 𝑝𝑝𝑅𝑅𝑟𝑟 → 𝑝𝑝𝐼𝐼𝑟𝑟 = 𝑣𝑣 − 𝑣𝑣 − (𝑎𝑎 − 𝑎𝑎).
Note that, given our assumptions on the parameters, this price is necessarily negative
(which is equivalent to being below marginal cost in this model, as the latter was assumed
to be zero). In other words, the incumbent can only attract readers by subsidising their
consumption.
At this price, I can break even whenever:
Π𝐼𝐼 = 𝑝𝑝𝐼𝐼𝑟𝑟 + 𝑝𝑝𝐼𝐼𝑎𝑎 = 𝑣𝑣 − 𝑣𝑣 − (𝑎𝑎 − 𝑎𝑎) + 𝑎𝑎 − 𝑎𝑎 > 0.
(1b) If the above break-even condition is not satisfied, i.e. if instead 𝑣𝑣 + 𝑎𝑎 − 𝑎𝑎 < 𝑣𝑣 +
𝑎𝑎 − 𝑎𝑎, then I will prefer to lose readers to R, so that R will make the sales to them at the
lowest price I is willing to offer, namely:
Π𝐼𝐼 = 0 → 𝑝𝑝𝐼𝐼𝑟𝑟 = −�𝑎𝑎 − 𝑎𝑎�.

R will then win the readers with the following offer:

𝑣𝑣 − 𝑝𝑝𝐼𝐼𝑟𝑟 = 𝑣𝑣 − 𝑝𝑝𝑅𝑅𝑟𝑟 → 𝑝𝑝𝑅𝑅𝑟𝑟 = 𝑣𝑣 − 𝑣𝑣 − �𝑎𝑎 − 𝑎𝑎�.
This leaves R with aggregate profits of
Π𝑅𝑅 = 𝑝𝑝𝑅𝑅𝑟𝑟 + 𝑝𝑝𝑅𝑅𝑎𝑎 = 𝑣𝑣 − 𝑣𝑣 − �𝑎𝑎 − 𝑎𝑎� + 𝑎𝑎 − 𝑎𝑎,
which is positive by the above assumption.
We can therefore conclude that, whenever
𝑣𝑣 + 𝑎𝑎 − 𝑎𝑎 > 𝑣𝑣 + 𝑎𝑎 − 𝑎𝑎 (𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 1)
is satisfied, the entrant will be excluded; otherwise, the entrant will prevail. This is the
main finding of this analysis and it deserves further comments.
First, we note that exclusion is more likely to occur if
1. the difference 𝑎𝑎 − 𝑎𝑎 is large, i.e. the rival is strongly disadvantaged vis-à-vis
advertisers because of the incumbent's installed base,
2. the difference 𝑎𝑎 − 𝑎𝑎 is small, i.e. the rival is not much more efficient at providing
advertisement benefits than the incumbent is,
3. the difference 𝑣𝑣 − 𝑣𝑣 is small, so that the rival's value to readers is not much larger
than that of the incumbent's.
Second, having established that exclusion can be an equilibrium, we consider its welfare
properties. Whether such exclusion is socially desirable or not depends on the strength of
the network externalities and the size of the respective cohorts. Under exclusion, the total
welfare generated by the newspaper industry is
𝑊𝑊𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 = (𝑛𝑛𝐼𝐼 + 1)𝑣𝑣 + 𝑎𝑎 + 𝑛𝑛𝑅𝑅 𝑣𝑣.
When instead the rival is successful in attracting the new cohort of readers and
advertisers, total welfare is given by
𝑊𝑊𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 = 𝑛𝑛𝐼𝐼 𝑣𝑣 + (𝑛𝑛𝑅𝑅 + 1)𝑣𝑣 + 𝑎𝑎.
Comparing the two welfare expressions, we see that entry always yields higher social
welfare, i.e.
𝑊𝑊𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 > 𝑊𝑊𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 .
This result is directly implied by our (Condition 1') and (Condition 2'), i.e. our
assumption that 𝑣𝑣 > 𝑣𝑣 > 𝑣𝑣 and 𝑎𝑎 > 𝑎𝑎 > 𝑎𝑎.
Thus, whenever (Result 1) is satisfied, so that exclusion will arise, we know that it is
anticompetitive in the sense that welfare will be reduced. We therefore demonstrated that
divide-and-conquer strategies may lead to inefficient exclusion even in a two-sided
market such as the media industry. The presence of network externalities, in itself, is not
sufficient to overcome the exclusionary effect exerted by divide-and-conquer pricing. On
the contrary, if the advertisers' valuation of the incumbent's installed base is particularly
strong, this represents a huge entry barrier for the rival newspaper.
Also note that in this model, exclusionary pricing always involves negative prices to
readers:
𝑝𝑝𝐼𝐼𝑟𝑟 = 𝑣𝑣 − 𝑣𝑣 − (𝑎𝑎 − 𝑎𝑎) < 0 because 𝑣𝑣 + 𝑎𝑎 < 𝑣𝑣 + 𝑎𝑎.

Thus, a ban on negative prices would be an efficient policy tool to prevent exclusionary
pricing in this model. As argued above, exclusion is socially inefficient in this model,
because the entrant is more efficient than the incumbent at providing utility to both
readers and advertisers, provided it can attract both sides of the new cohort of consumers;
we also showed that whenever the incumbent instead manages to attract the readers
(which implies that all advertisers will then turn to the incumbent as well), this requires
the incumbent to set negative prices to the readers. It therefore follows that a ban on
negative prices will ensure that all instances of inefficient exclusion are ruled out.
Note, however, that this policy would not make everyone better off: whenever exclusion
would have occurred absent this ban on negative (i.e. below-cost) prices, buyers on the
reader side of the market will now pay a higher cover price, or, more precisely, they will
lose the subsidy they would have received from the incumbent. Advertisers instead will
benefit from this policy, because they obtain a larger net benefit in case the entrant
prevails.
Extending Dixit (1980) to multi-sided platforms

The previous section studied a rather canonical case where inefficient exclusion can
happen with two-sided platforms. This possibility result, though, does not give too many
insights into whether exclusionary practices are more or less likely to arise in a two-sided
environment. We tackle this question more directly in this section, by building on the
seminal paper of Dixit (1980). Dixit (1980) argues that the threat of predating on an
entrant is not credible unless the incumbent finds a way of committing to such a course of
action. Using the words of Dixit, "the prospective entrant was assumed to believe that the
established firm would maintain the same output after entry as its actual pre-entry output.
Then the established firm naturally acquired a Stackelberg leadership role. However, the
assumption is dubious on two opposing counts. First, faced with an irrevocable fact of
entry, the established firm will usually find it best to make an accommodating output
reduction. On the other hand, it would like to threaten to respond to entry with a
predatory increase in output. Its problem is to make the latter threat credible given the
prospective entrant's knowledge of the former fact."
The analysis in this section takes this strategic behaviour described by Dixit (1980) and it
applies the same logic in the context of multi-sided platforms by introducing indirect
network externalities. For the purpose of this exercise, the model underlying our analysis
is based on the framework developed by Armstrong (2006). 15
We start by recalling the basic features of the framework developed in Armstrong (2006).
There are two groups of agents, i.e. two demands, and two competing platforms. The
utilities of the agents are defined such that utilities of a consumer on one side of the
platform 𝑖𝑖 increases in the participation of consumers on the other side, 𝑛𝑛𝑖𝑖𝑗𝑗 , of the same
platform. The parameters that capture the marginal increase in utility due to indirect
network externalities are a1 and a2. Denote by 𝑝𝑝1𝑖𝑖 and pi2 the prices paid by customers to
join platform 𝑖𝑖 on side 1 and 2, respectively. Hence utilities of customers are respectively
𝑈𝑈1𝑖𝑖 = 𝛼𝛼1 𝑛𝑛2𝑖𝑖 − 𝑝𝑝1𝑖𝑖 𝑈𝑈2𝑖𝑖 = 𝛼𝛼2 𝑛𝑛1𝑖𝑖 − 𝑝𝑝2𝑖𝑖 .
Following the Hotelling model, customers are located along the unit line. Under some
regularity conditions, a set of demand functions that are well-behaved and a market-
sharing equilibrium exist. The two platforms compete by setting prices, and consumers
are bound to single-home.

In this standard setting, the analysis of Dixit (1980) is applied, with the important
difference that competition is in prices, not in quantities. One platform is considered to be
the incumbent and there is another platform that, if it decides to enter, will have to bear an
entry cost of K. This entry cost impacts negatively the expected profit of the new entrant.
The existence and the size of K is public information and therefore the incumbent
platform can take advantage of it. The incumbent has thus the option to either
accommodate entry becoming a Stackelberg leader, or to exclude entry and enjoy
monopolistic profits, albeit under the constraint that its output must be high enough (i.e.
its price must be low enough) to not leave any room for an entrant to cover its fixed cost
of entry. 16 Dixit (1980) shows that above a certain level of K, the incumbent has the
incentive to exclude the new entrant by expanding its capacity to a point where
production of the entry-deterring output level becomes a credible threat. In the setting of
the paper where platforms compete by setting prices, the analysis shows that the
incumbent has the same incentive to exclude the new entrant by decreasing prices.17
The introduction of the indirect network externalities does not change the basic intuition
identified in Dixit (1980), so that even platforms find it profitable to exclude entry. In the
following, the basic results of the analysis are derived and presented. 18
By assuming symmetric indirect network externalities, i.e. a1 = a2 = a > 0, and solving
the basic strategic game as described above, it is possible to derive the equation below
that identifies the difference between the profit of the incumbent from exclusion and from
accommodating entry.
1 − 𝛼𝛼
∆𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 = �32�𝐾𝐾/(1 − 𝛼𝛼) − 25�.
8
By solving the equation for ∆𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 = 0, one can find the critical threshold level for the entry
cost, K*(a), above which the incumbent prefers to exclude rather than accommodate the
entrant. This threshold depends on the intensity of the externality, α.
625(1 − 𝛼𝛼) 25
𝐾𝐾 ∗ (𝛼𝛼) = < (1 − 𝛼𝛼).
1024 16
By studying the function, it is straightforward to see that the higher the externality, the
lower K*(a). This implies that for any given K, the strategy of exclusion (i.e. lowering
the prices) becomes more attractive for the incumbent when indirect externalities are
stronger. Figure 1 below is another way of presenting the result, where the shaded area
represents the parameter region in the α-K space where the incumbent has the incentive to
exclude entry. The dark blue middle line represents the threshold level K*(a). Below this
line, the fixed cost of entry, K, is too low to make it worthwhile for the incumbent to deter
entry; the incumbent would rather accommodate the entrant and enjoy duopoly profits,
because deterrence through low prices would be too costly.
The yellow upper line represents the second threshold for K, namely the level at which
entry is "blockaded": when K exceeds the entrant's duopoly profits in the accommodating
scenario, it is never profitable for a competitor to enter because its expected profit will
never be positive. 19 This value also decreases with the level of the externality, meaning
that as the externalities become more intense, a monopoly is more and more likely to
arise even without any need for the incumbent to put an exclusionary strategy in place.
The blue wedge in Figure 1 is the most interesting from a policy point of view, because it
is the parameter region where the entrant would enter absent the strategic foreclosure by
the incumbent, but the incumbent finds it profitable to foreclose. It is possible to observe
that for a given K the presence of indirect network externalities makes the strategy of

foreclosure more attractive for the entrant. At the same time, we see from Figure 1 that
for any given level K, it is also more likely that entry will be blockaded, i.e. that entrants
will not find it profitable to enter even though the incumbent sets its prices in good faith,
i.e. in a way that is compatible with accommodation.
Figure 1. Exclusion arises in the shaded area
By relaxing the hypothesis of symmetry between the parameters capturing the indirect
network externalities, it is still possible to derive the equation below that identifies the
difference between the profit of the incumbent from exclusion and from accommodating
entry (and thus the strategic incentive of the incumbent to foreclose entry). Relaxing this
assumption is quite crucial given that arguably, the different sides of platforms typically
show different degrees of externality, which will not change simultaneously.
2(𝛼𝛼1 + 𝛼𝛼2 )2 + 𝛼𝛼1 𝛼𝛼2 − 9
∆𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 = −(2 − 𝛼𝛼1 − 𝛼𝛼2 ) + + (𝛼𝛼1 + 𝛼𝛼2 )�2(2 − 𝛼𝛼1 − 𝛼𝛼2 )𝐾𝐾
4(2 + 𝛼𝛼1 + 𝛼𝛼2 )
In this framework, solving for ∆𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 = 0 and finding the analytical expression of
K*(a1,a2) is more complex. The assessment is therefore done numerically, fixing one
parameter capturing the externality, here a1, while letting K and a2 vary. 20 Figure 2
shows the results of this exercise. The graph confirms the existence of the critical
threshold K*(a1,a2), above which exclusionary strategies become attractive for the
incumbent. 21 Moreover, it is also possible to observe that if there is a positive shock to
either of the parameters a1 or a2, the area where exclusionary strategies are desirable for
the incumbent expands. In other words, even for lower entry cost K it is still profitable for
the incumbent to price low in order to prevent the entrance of a competitor.
This allows concluding that it is enough to have a strong externality on one side of the
platform to make exclusion more attractive for the incumbent. A preliminary assessment
of these results suggests that the incumbent has the possibility to exclude entry on either
of the two sides. This can be consistent with the fact that the two sides are
interchangeable, and so the incumbent will always charge the lower price on the side of
the market where it is least costly to do so. Therefore, this might explain why the
structure of the network externalities across the two sides of the market does not seem to
matter, but only their overall intensity.

Figure 2. The critical threshold level K*(a1,a2) when network externalities are asymmetric
across the two sides of the platform
The application of these results should not be limited to the case of entry deterrence as
described above. It is also conceivable to interpret the entry cost parameter K as a
financial shock that can reduce the profitability of the follower. By giving this
interpretation to K, the results of the model take the flavour of financial predation.
Observing the financial shocks of the rival, the incumbent is taking advantage of these
financial fragilities of the rival and decides to decrease its price in order to make it
unprofitable for the rival to remain active in the market. This behaviour of the predator is
incentive compatible given the new structure of costs of the prey. The analysis above
seems to suggest that, in the presence of indirect network externalities, platforms are even
more prone to pursue predatory strategies of the kind described above.
All in all, the extensions of two strands of the literature on exclusionary practices are
consistent with indirect network externalities making it more likely for the incumbent to
engage in exclusionary behaviour. Moreover, it is enough to have an increase in the
indirect network externalities on at least one side of the platforms to make exclusionary
strategies more attractive to the incumbent.
3. Policy
The increasing importance of platforms in the current economy has raised several policy
debates. In this section, we select those that are the most relevant to the European
Commission and on which more research should be focused in order to come to a solid
understanding.
The definition of platforms and the existence of indirect network externalities

In recent years, the European Commission has been more than ever confronted with
arguments related to the presence of indirect network externalities. It seems therefore that
there is an increasing tendency of trying to characterise many businesses as two- or multi-
sided platforms. It is worth recalling that it is very important to verify the existence of
such indirect externalities. Investigating a possible existence is however not enough.
Their presence has to be significant for users, and there has to be evidence that
externalities affect strategic business decisions. It is submitted that only under those

circumstances it is deemed necessary to embark on an analysis that includes all the

multiple sides of the platform and that tries to disentangle their relationship.
Along this line, it is important to understand when network externalities are exhausted. It
is possible that beyond a certain level of adoption, a marginal increase in participation
does not increase the utility of participation of the other participants anymore. In mature
markets, it is conceivable that a marginal increase in the size of the network does not
create any indirect network externality. The size of the platform seems then to be an
important preliminary indication in order to understand whether such externalities are still
present. In a similar vein, it is conceivable in certain circumstances that only a small
subset of customers can generate externalities, i.e. “marquee customers”. Indirect network
externalities are generated as long as these particular users participate. Beyond these
customers, the participation of many other customers can very well be irrelevant and may
not trigger any externality on customers on the other side. Essentially, customers can be
differentiated and such differentiation can be responsible for the presence or absence of
indirect externalities.
One additional element to take into consideration is the cost of multi-homing by users.
Typically the presence of strong network externalities is correlated with the presence of
high costs of multi-homing. Given that it is difficult for customers to “home” several
platforms, it is likely that those customers would value large participation on the other
side. Eventually, it is also important to understand the sign of the indirect externality.
Those externalities can be positive or negative and this will have an impact on the
assessment of the strategic interaction of platforms.
Complexity does not imply softer antitrust scrutiny

One of the important features of multi-sided platforms is that indirect network
externalities affect the pricing decisions of platforms. It is a well-known result that
platforms can price one side below costs. This has often lead many commentators to
argue that below-cost pricing of platforms should not be a concern for antitrust
authorities. However, it seems that the evidence is not unanimous and that there are also
commentators supporting a different view, including the results of this paper.
It seems conceivable that prices on both sides of the market can be set by a firm at a level
that is insufficient to cover the total variable costs of the platform. In these circumstances,
a competing platform may become unprofitable irrespective of how it structures its prices
and will exit the market, allowing the predatory firm to raise its prices on both sides and
earn economic profits sufficient to more than recoup its earlier losses. In this case the
analysis might still focus on a comparison of incremental revenues versus incremental
costs defined over packages of goods or services that serve the interests of customers on
both sides of the platform.
Moreover, as described in Fletcher (2007), 22 a dominant platform may predate through
asymmetric pricing between the two sides of the market. The issue is whether a given
pricing structure can affect market structure, and specifically whether low pricing on one
side of a market can prevent entry into both sides. Fletcher (2007) argues that it is
conceivable to assume that in case of asymmetric platforms predatory strategies can take
place. Assume competitors of the dominant platform have limited ability to turn extra
business on one side of the market into incremental revenues on the other. Such firms
could find it hard to compete against a very asymmetric pricing structure, and therefore
may be excluded from both sides of the market. In line with the theoretical discussion
developed in Fletcher (2007), the more formal results of this paper also seem to suggest

that predatory strategies typically observed in the context of standard markets carry over
to markets exhibiting indirect network externalities.
It is, however, important to stress that an analysis of indirect network externalities should
be part of the antitrust assessment. The typical tools applied in the analysis of single-sided
markets need not be abandoned but it is crucial to adapt them in order to capture the
specificity of platforms. One example of this effort is described in Behringer and
Filistrucchi (2015). 23 In order to evaluate predatory strategies of platforms, they propose
an augmented Areeda-Turner test that encompasses the presence of indirect network
externalities. By applying this test to two real-life examples they obtain two interesting
results. The first result shows that false positives might occur by applying a one-side test
in a context of indirect network externalities. This is indeed a call for using the right tool
when assessing platform competition. Their second result shows that a false negative
might also occur by applying a one-side test. This last result is thus also consistent with
the presence of predatory strategies performed by multi-sided platforms. This empirical
evidence in turn supports the position of maintaining an unchanged scrutiny of antitrust
authority for multi-sided platforms.
In conclusion, there seems to be convincing evidence that suggests that price structures
due to indirect network externalities can be used in a predatory fashion. Above-cost
predation is also possible if predation means sacrificing short-run profits to weaken rivals
and doing so in a way that lowers welfare. In this framework, predation can be hard to
detect: a standard price-cost test will not be reliable because there are non-predatory
reasons to price below cost; 24 and using the exit of rivals as indicator is not a sufficiently
solid standard of proof either, because the market may also tip absent predation. We can
thus conclude that the standard tools of antitrust analysis need to be adapted to the context
of two-sided markets to avoid false positives and false negatives alike.
Business asymmetries
A topic that seems to attract significant attention is asymmetric competition between the
advertising supported business model (i.e. multi-sided platform) and the subscriber-based
business model (traditional company). The asymmetry in the business models has a direct
repercussion on the competition for customers. One possible scenario faced by consumers
is that free products offered by the platform will compete with the products offered at a
positive price by the traditional company. In these circumstances it is often the case that
products show some degree of differentiation, either horizontal or vertical. Therefore it is
likely that the obvious effect of customers consuming the free product can be
significantly mitigated. However, from a policy perspective it might be important to
understand whether events like market exits by traditional businesses, which are most
likely to be displaced, should trigger antitrust intervention.
This is an open question and so far little effort has been put into trying to formally
understand the welfare implications of the competition between these two business
models.
More attention to leverage theories, for instance tying strategies

In Eisenmann at al. (2006), 25 in the context of defining strategic behaviour of platforms,
the authors identify the so-called "risk for envelopment". They explain that any platform,
especially the small and specialised ones, face the risk of been enveloped by a bigger
platform that decides to start competing head-to-head by enlarging its bundle of offers.
New entry into adjacent markets is typically welfare increasing and should be welcomed

by antitrust authority. However, the risk of a platform leveraging market power in one
market into adjacent markets should not be underestimated. Recent research, like Choi
and Jeon (2016), 26 focuses on the use of anticompetitive tying in order to overcome price
constraints, i.e. impossibility to charge negative prices. Price rigidities can be the result of
several factors, including the fear of triggering antitrust investigations for predatory
pricing. What the paper then suggests is that anticompetitive tying and predation are
interchangeable strategies. More attention therefore has to be put on tying and more
generally leveraging given that it can mask anticompetitive entry.
4. Conclusions
The aim of the paper is two-fold. First, it has a research objective as it extends two strands of the
literature about exclusionary pricing to the framework of indirect network externalities and platform
competition. Our preliminary results show that traditional exclusionary practices carry over to platform
competition and in some circumstances indirect network externalities accentuate the incentive to
foreclose by incumbents. Second, it also discusses some of the main policy topics that are currently
discussed in the public domain, complemented with some topics that so far have received little attention
despite their relevance.
Notes
1 Evans, David. “The Antitrust Economics of Multi-Sided Platform Markets.” Yale Journal on
Regulation 20 (2003): 325-82.
2 Jean-Charles Rochet and Jean Tirole. "Two-sided markets: a progress report." RAND Journal of
Economics 37, 3, (2006): 646.
3 See, for instance, Evans, David and Richard Schmalensee. “Industrial Organization of Markets
with Two-Sided Platforms.” Competition Policy International 3, 1 (2007): 27.
4 Segal, Ilya R., and Michael D. Whinston. "Naked exclusion: comment." The American Economic
Review 90, 1 (2000): 296-309.
5 Dixit, Avinash. "The Role of Investment in Entry-Deterrence." The Economic Journal 90, 357
(1980): 95-106.
6 Rasmusen, Eric B., J. Mark Ramseyer, and John S. Wiley Jr. "Naked exclusion." The American Economic
Review (1991): 1137-1145.
7 Segal, Ilya R., and Michael D. Whinston. "Naked exclusion: comment." The American Economic
Review 90, 1 (2000): 296-309.
8 Vasconcelos, Helder. "Is exclusionary pricing anticompetitive in two-sided markets?"
International Journal of Industrial Organization 40 (2015): 1-10.
9 The results of this paper are qualitatively similar if instead network externalities run in both
directions.
10 Subsidising consumption on one side of the platform makes sense whenever a platform wishes to
build an installed base of users on one side, so as to make its platform more attractive for users on
the other side, who will then be willing to pay a positive price to join. In this sense, platforms may
apply pricing practices that resemble divide-and-conquer strategies even without any exclusionary
intention, in particular whenever the network externalities are two-sided. In the present model,
however, a monopolist would not need to subsidise consumption on any side of the market: any

price slightly below r will ensure that group 2 buyers want to participate in this market, so that the
platform will also attract group 1 buyers and can charge positive prices to them.
11 Recall the assumption that the old buyers are locked in with the incumbent and cannot switch
platform in case of successful entry.
12 Fumagalli, Chiara, and Massimo Motta. "A simple Theory of Predation." The Journal of Law and
Economics 56, 3 (2013): 595-631.
13 In fact, their paper discusses the applicability of the general results to two-sided markets in a
subsection.
14 Competing first for readers, rather than advertisers, is a natural modelling choice here, given that
advertisers care about the readers anyone of the two newspapers manages to attract, while readers
are indifferent about the platform picked by the advertisers.
15 Armstrong, Mark. "Competition in two‐sided markets." The RAND Journal of Economics 37, 3
(2006): 668-691.
16 It is worth mentioning that the incumbent, under the monopoly scenario, serves the entire set of
customers, which in the Hotelling model amounts to a demand equal to 1, i.e. 100% of the
population.
17 One way for the incumbent to achieve commitment to such a limit price is to sign long-term
contracts with consumers which explicitly exclude price increases over the time horizon relevant
for entry.
18 Note that the demand functions in this model also depend on the differentiation parameters in each
Hotelling market, t1 and t2. For the purpose of this exercise and in order to simplify mathematical
expressions, the analysis sets t1 = t2 = 1. This means that the degree of differentiation of the two
markets involved are symmetric. For the purpose of the analysis this is irrelevant. On a more
technical ground, this assumption implies that the necessary and sufficient condition to have a
market sharing equilibrium becomes 4 - ( a1 + a2)2 > 0 which also implies that 2 - a1 - a2 > 0.
25
19 The expression of the threshold value for "blockaded" entry is 𝐾𝐾 = (1 − 𝛼𝛼).
16
20 Results are exactly symmetric if instead a2 is fixed and a1 is allowed to vary.

21 Note that in this graph the area of blockaded entry is not shown but it exists. The decision of not
showing was simply dictated by clarity purposes.
22 Fletcher, Amelia. "Predatory pricing in two-sided markets: A brief comment" Competition Policy
International, Spring 2007, Vol. 3, No. 1.
23 Behringer, Stefan, and Lapo Filistrucchi. "Areeda–Turner in two-sided markets." Review of
Industrial Organization 46, 3 (2015): 287-306.
24 See also DG Competition, "Communication from the Commission — Guidance on the
Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive
exclusionary conduct by dominant undertakings", OJEU 2009/C 45/02, of 24 February 2009,
Recital 26, Footnote 3: "[…] in the case of two sided markets it may be necessary to look at
revenues and costs of both sides at the same time."
25 Eisenmann, Thomas, Geoffrey Parker, and Marshall W. Van Alstyne. "Strategies for two-sided
markets." Harvard Business Review 84, 10 (2006): 92.
26 Choi, Jay Pil, and Doh-Shin Jeon. "A Leverage Theory of Tying in Two-Sided Markets." (2016).
Unpublished manuscript.

. PART V. EFFICIENCIES │ 149
Part V. Efficiencies

7. QUANTIFYING HORIZONTAL MERGER EFFICIENCIES IN MULTI-SIDED MARKETS │ 151
7. Quantifying horizontal merger efficiencies in multi-sided markets:

An application to stock exchange mergers
By Enrique Andreu and Jorge Padilla 1
Abstract
Stock exchanges are platforms operating in multi-sided markets. Mergers between stock
exchanges can produce significant efficiency benefits, some of which can accrue directly
or indirectly to the users of the integrated exchange: intermediaries (brokers and
dealers), final investors and issuers (listed companies). In particular, stock exchange
integration can reduce the implicit costs of trading by increasing market liquidity. In this
paper we investigate the liquidity implications of the integration of Euronext’s cash
market. We find that the series of cash mergers that led to the creation of Euronext had a
positive impact on liquidity – namely, on bid-ask spreads, volatility and traded volume.
This exercise illustrates how past mergers can be used to assess empirically the potential
efficiencies resulting from mergers between platforms operating in multi-sided markets.
1. Introduction
Multi-sided markets are characterised by the presence of cross-platform welfare effects

that users cannot internalise absent pricing and non-pricing co-ordination by a platform. 1
Those welfare effects can be access externalities (the benefit a user on one side of a
platform generates for users on the other side of the platform) or usage externalities (the
benefit a user on one side of a platform generates for a user of the other side of the
platform when increasing the number of transactions in that platform). 2
As explained by Wright (2004) and Evans and Schmalensee (2007), some of the standard
economic intuitions that underpin antitrust policy and merger control in traditional (one-
1
Enrique Andreu is a Senior Vice President at Compass Lexecon. Jorge Padilla is Senior
Managing Director at Compass Lexecon, Research Fellow at CEMFI (Madrid) and teaches
competition economics at the Barcelona Graduate School of Economics (BGSE) and the Toulouse
School of Economics (TSE). This paper was prepared for presentation at the OECD Competition
Group Workshop Rethinking the use of traditional antitrust enforcement tools in multi-sided
markets to be held in Paris in June 2017. We wish to thank participants at the OECD workshop for
their comments and suggestions. This paper updates and upgrades using publicly available data the
econometric work we performed in the context of the Deutsche Börse / NYSE Euronext merger.
The opinions in this paper are our own and do not necessarily represent the views of Compass
Lexecon’s clients or other Compass Lexecon economists.

152 │ 7. QUANTIFYING HORIZONTAL MERGER EFFICIENCIES IN MULTI-SIDED MARKETS
sided) markets need not apply in multi-sided markets. 3 In particular, mergers between
platforms competing in multi-sided markets need not be anticompetitive. First, the merger
may be welfare enhancing even when it leads to higher post-merger prices for both sides
of the market because users on either side of the merged platform will benefit from
increased access to a greater pool of users on the other side of platform. 4 Second, the
merger may even result in a reduction in prices since the merged platform may internalise
the cross-group externalities between the merging platforms: if the merging platforms
become “interoperable”,5 then each of the merging platforms will lower prices to benefit
from the increase in demand on the other platform. 6
The empirical evidence of the price and welfare effects of mergers in two-sided markets
is sparse. Some of these studies have focused on media markets, since those are
considered to be good examples of two-sided markets. Chandra and Collard-Wexler
(2009) investigated the price effects using data on a series of large merger in the
Canadian newspaper industry in the late 1990s. 7 Chandra and Collard-Wexler employed
difference-in-difference and difference-in-difference matching methods to compare price
changes in newspapers which change hands with those that did not and found that these
mergers did not lead to higher prices either for subscribers or advertisers. More recently,
Jeziorski (2014) examines the effects of mergers in the U.S. radio industry. 8 He finds that
they increase listener welfare marginally but have a more significant negative welfare
effect on advertisers.
A few authors have conducted post-mortem econometric analysis of mergers (i.e. ex-post
merger evaluations) among stock exchanges in order to assess their potential efficiencies,
if any. Stock exchanges are widely considered to be multi-sided markets. 9 Stock
exchange integration may in principle increase welfare by increasing market liquidity
and, hence, reducing the implicit costs of trading. The reduction of implicit costs may in
particular result from a reduction of bid-ask spreads or lower price volatility (because a
larger and more stable order flow reduces the noise induced by individual orders). There
are numerous mechanisms through which stock exchange mergers can increase liquidity
and decrease users’ implicit costs. 10 A merger between exchanges will increase liquidity
if it helps intermediaries to defray the costs of access to the trading platform and of
maintaining a continuous market presence. Standardised access to market data, indices
and post-trading services helps also the liquidity of integrated cash markets. Also
harmonised trading functionality, rules and regulations will reduce the regulatory costs of
trading in different markets. In addition, liquidity will increase if the merger reduces
adverse-selection costs, due to the presence of informed traders. This will happen if the
merger has a positive impact on trading activity and the additional order flow comes
mainly from uninformed traders or elicits more aggressive competition between informed
ones. A stock exchange merger may also increase liquidity (and lead to lower bid-ask
spreads) if it reduces the inventory-holding costs of market makers. This is because the
merger is likely to make the order flow more predictable and lower the costs of
rebalancing market-makers’ inventories after the execution of large orders. Finally,
liquidity may increase (and bid-ask spreads may fall) because the merger is likely to
induce entry by market professionals operating elsewhere, as a result e.g. of harmonised
rules and admission criteria, and thereby lead to greater competitive pressure both in
quote-setting and in brokerage fees.
In the U.S., Arnold et al. (1999) studied the effects on liquidity of three successive
mergers between regional U.S. stock exchanges in the 1940’s and 1950’s. 11 They found
that the bid-ask spreads of merged exchanges were narrower than those on the remaining
exchanges. The trend towards an efficient, consolidated capital markets infrastructure is

more recent in Europe than in the United States, but shows similar benefits. Pagano and
Padilla (2005b) investigated the liquidity effects resulting from the integration of the
French, Belgian, Dutch and Portuguese stock exchanges between September 2000 and
November 2003. 12 These mergers led to the creation of Euronext. This sequence of
mergers provides an extremely valuable natural experiment for the purposes of estimating
the liquidity effects of cash exchange mergers. First, the multi-stage nature of the
Euronext integration process – with three sequential mergers – makes it possible to better
identify the liquidity impact of stock exchange mergers, as it allows the empirical
estimation to deal more rigorously with spurious correlation. Second, since the timing of
the three mergers was predetermined at the outset and there were no departures from the
merger plan, there should be no concerns about reverse causality.
Pagano and Padilla (2005b) found that the creation of Euronext led to a reduction in the
bid-ask spreads of the large-cap securities traded in Paris, Brussels, Amsterdam and
Lisbon. They also found that the integration of those exchanges also led to an increase in
traded volume and a reduction in volatility for those stocks. Nielsson (2009) also
examined the liquidity effects of the Euronext integration process. 13 Unlike Pagano and
Padilla (2005b), he analysed the impact of the merger on the liquidity of all firms’ stocks
listed in the Paris, Brussels, Amsterdam and Lisbon exchanges and not just large caps.
Nielsson found that the Euronext mergers increased the liquidity and, therefore, reduced
the implicit trading costs of large caps. However, he found no statistically significant
effect of the merger on small and medium caps.
A difficulty with both studies is that their datasets are relatively limited and, in particular,
the duration of the post-merger period is short. Pagano and Padilla (2005b) only had data
until December 2004 – one year after the last integration event; Nielsson (2009) only
until 2006. This raises the concern that the effects that they attribute to the Euronext
mergers may not have been properly identified. Since the mergers took place at the time
of the collapse of the dot.com bubble (2000-2002) and the recession of the European
economy (2000-2001) and the U.S. economy (2002-2004), the post-merger increase in
liquidity documented in these papers may simply reflect the growth of trading volumes in
the aftermath of these crises.
Distinguishing between the liquidity effect of the mergers and these crises requires data
on a longer post-merger period than that used in Pagano and Padilla (2005b) and Nielsson
(2009). A longer post-merger period could help identify the effect of the mergers
correctly because, unlike the effect of the crises, the liquidity impact of a stock exchange
merger should be long lasting: the reduction in access costs, adverse selection costs,
inventory costs, and the increase in the strength of competition among intermediaries
resulting from the merger will likely persist indefinitely.
This paper thus revisits the analysis conducted by Pagano and Padilla (2005b) using data
from December 2000 to December 2010 to test whether, other things equal, the mergers
that led to the creation of Euronext had a long-lasting effect on bid-ask spreads, volatility
and volume. Expanding the post-merger period requires controlling for the important
changes in European cash trading that took place after the creation of Euronext. Most
importantly, the Markets in Financial Instruments Directive (MiFID) led to the entry of
new trading platforms (MTFs), which in a short time captured a significant market share
and is likely to have had an effect on liquidity. In addition, Euronext implemented a tick
size change in 2007, which is also likely to have had an impact on market liquidity.
Our results confirm Pagano and Padilla’s conclusions and show that the impact on market
liquidity that they identified is long lasting, as one would expect if those effects were

indeed caused by the creation of Euronext. Like them, we find that the creation of
Euronext increased the liquidity of the merging exchanges. This led to a reduction in the
bid-ask spreads and historical volatility of large-cap securities traded in Paris, Brussels,
Amsterdam and Lisbon. The creation of Euronext also resulted in an increase in traded
volume. These results are not only economically meaningful and statistically significant,
they are also robust and unlikely to be explained by omitted variables and reverse
causality (endogeneity).
This paper also investigates the potential liquidity impact of the merger between Euronext
and the NYSE Group (NYSE). This merger took place in April 2007. Because, unlike the
Euronext mergers, it did not involve the integration of the trading and clearing platforms
of the merging parties, we would expect the merger to have no impact on liquidity. This
is indeed what the data shows. We believe these results are consistent with our findings
on the creation of Euronext and serve to confirm them, since testing for the liquidity
impact of the merger between Euronext and the NYSE Group (NYSE) amounts to
performing a “placebo test.”
The remainder of this paper is structured as follows. Section 2 describes the integration
process that led to the creation of Euronext and the subsequent changes to the industry. In
Section 3 we investigate the impact of Euronext integration process on bid-ask spreads
using different data sources and econometric models. Section 4 presents several
robustness tests: using alternative integration dates, different measures of liquidity
(volatility and traded volume) and alternative controls. In Section 5, we analyse the
impact of the merger between NYSE and Euronext. Section 6 discusses the causal
interpretation of the results in Sections 3 to 5. Finally, Section 7 concludes with some
more general comments about the assessment of efficiencies in horizontal mergers in
multi-sided industries. All tables and figures described in the text can be found in the
annexes to the paper.
2. The creation of Euronext
The creation of Euronext in September 2000 resulted in the integration of the French,
Belgian, Dutch, and Portuguese stock exchanges into a single trading and clearing
platform. Prior to the creation of Euronext, there were four separate trading and three
separate clearing platforms (Portugal had no CCP). Since November 2003, the users of
the Paris, Brussels, Amsterdam, and Lisbon exchanges have operated on a single trading
platform and a single clearing platform.
The integration of the cash markets that formed Euronext proceeded in stages. First, the
trading platform of the Paris market –the NSC system– became the platform for the other
three cash markets. In May 2001, the Brussels exchange migrated its trading platform to
the NSC system. Amsterdam followed suit in October 2001. Cash trading fees were
harmonised across Amsterdam, Brussels and Paris. The Lisbon exchange migrated to the
NSC system in November 2003.
The exchanges that form Euronext also integrated their clearing platforms. That process
took place in parallel, but with some delay, relative to the integration of the cash trading
platforms. The Paris market adopted the externally sourced Clearing 21 system in
September 2000. The Brussels cash market was migrated to the Clearing 21 system in
March 2002, while Amsterdam migrated in October 2002. Clearing operations across the
three locations were consolidated into Clearnet SA. Clearing in Lisbon was created in
November 2003.

Following Pagano and Padilla (2005b) our analysis considers the liquidity impact of the
migration of cash trading and clearing on the Amsterdam, Brussels, Paris and Lisbon cash
markets onto common trading and clearing platforms. However, we have also analysed
the potential effect of the integration of the trading platforms as a robustness test.
Since the creation of Euronext in November 2003 several events are likely to have
impacted the liquidity of the securities traded in Euronext. We highlight (and control for)
two such events in this paper. First, in November 2007 competitive trading platforms
known as multilateral trading facilities (or MTFs) entered the European cash trading
market. They have grown rapidly since then. MTFs are trading systems that make cash
instruments from different exchanges or sources available for trading. Currently there are
over five different pan-European blue-chip MTFs operating in Europe, the largest of
which is Chi-X. Second, in 2007 the Euronext tick size (the minimum price increment at
which trades may be made) was reduced and this is likely to have had an impact on
liquidity. Previous empirical literature has found that a reduction in the tick size leads to a
bid-ask spread reduction. This is because investors are able to tighten their quotes when
the minimum price increment becomes smaller.
3. An econometric analysis of Euronext bid-ask spreads
In this section we analyse the impact of the creation of Euronext on bid-ask spreads using
standard multiple regression techniques. Bid-ask spreads are the most-often used
indicator of cash trading liquidity. We first describe the bid-ask spread data we use, the
methodology employed and our main results.
Bid-ask spread data

We use the bid-ask spread measure calculated by Bloomberg for the main securities
traded in Amsterdam, Brussels, Lisbon and Paris exchanges. The Bloomberg’s bid-ask
spread is defined as the difference between the daily closing ask price (PA) and the daily
closing bid price (PB), normalised as follows:
( PA − PB )
Bid − Ask Spread = ,
(( PA + PB ) / 2)
This bid-ask spread measure has been calculated using bid and ask prices provided by
Bloomberg for each of the securities included in the main indices of the Paris, Brussels,
Amsterdam and Lisbon stock exchanges: CAC 40, BEL 20, AEX, and PSI, respectively.
We have data on a daily basis for the period between 1 December 2000 and 31 December
2010: 362,103 observations. 14,15
Figure A.1 in Annex A plots estimated year-month fixed effects for a model of the bid-
ask spread on stock i at time t for each of the stock exchanges under analysis. It shows us
the evolution of the average (across stocks, within month) bid-ask spread on each stock
exchange. For the Amsterdam, Belgium, and Paris exchanges, the basic pattern in the data
is: bid-ask spreads remain flat up to 2002 and fall during the post-merger era (until the
crisis hits in 2007 and 2008, when bid-ask spreads rise and then subsequently decline as
we move into 2010).

Econometric methodology
In order to assess the impact of the creation of Euronext on market liquidity, we conduct a
multi-stage before and after analysis around the three key integration milestones: (1) the
integration of the clearing and trading functions of the Paris and Brussels stock exchanges
in March 2002; (2) the integration of the Amsterdam trading and clearing system into
Euronext in October 2002; and (3) the integration of the Lisbon stock exchange in
November 2003. That is, we compare the daily bid-ask spreads defined above after each
of the integration dates with the same daily bid-ask spreads before integration. Our basic
models relate our bid-ask spread measure with an integration dummy that equals 1 after
integration and 0 before integration.
To isolate the impact of the creation of Euronext on bid-ask spreads, we control for other
factors that may explain differences in bid-ask spreads over time and across securities
traded on the different exchanges. This requires using multiple regression techniques. 16
We include in our basic regression model security fixed effects, a measure of market
volatility and indicator variables for relevant macroeconomic, political, and regulatory
events. 17 These variables take into account that differences in bid-ask spreads between
securities may persist over time and that bid-ask spread fluctuations may be driven by
factors other than the integration. We also included controls for volume and volatility
from non-Euronext exchanges, domestic GDP per capita, the volume traded at MTFs, and
an indicator variable to capture the effect of Euronext’s tick change in 2007.
More formally, we estimated a security-level panel-data model using Bloomberg’s daily,
security-level bid-ask spread data and a security-level panel-data model using Euronext’s
security-level weighted average bid-ask spread data. We used a panel data approach
because this allows us to (1) avoid complex aggregation issues, (2) estimate the impact of
integration on all the exchanges of the Euronext platform in a single regression, and (3)
obtain estimates for the impact of integration in the various exchanges of Euronext that
can be readily compared.
Our basic security-level panel-data model can be formally written as,
yit = a + β1 Integrationit + β 2 Z it + β 3 X it + ηi + λt + e it
where: 18
• yit is the natural logarithm of the bid-ask spread of security i at period t.
• Integrationit is a dummy variable that takes the value of 1 for any security i and
period t after the integration of the trading and clearing platforms of the exchange
where security i is traded, and 0 otherwise. The sign of the coefficient of the
integration dummy characterises the relation between the bid-ask spread and the
creation of Euronext. A negative sign would indicate that bid-ask spreads declined
(and thus liquidity increased) as a result of the creation of Euronext.
• Zit is a vector of variables that control for other determinants of the liquidity of the
market. We included: the (20-day) historical volatility of the FTSE100 and DAX
indices (source: Bloomberg); the traded volume on the Frankfurt exchange
(source: Deutsche Börse); a tick size dummy, which takes a value of 1 after 2007
and is equal to 0 before then; 19 the per capita GDP of each of the countries with
Euronext exchanges (source: Eurostat); and the volume traded at MTFs (source:
Bloomberg). 20

The first two controls are meant to capture common trends of a global or pan-European
nature that could have affected the bid-ask spreads of Euronext’s large-cap securities and
that have nothing to do with the process of formation of Euronext. We would expect to
find a positive relation between bid-ask spreads and the volatility of the FTSE100 and
DAX indices, and a negative relationship between bid-ask spreads and the volume traded
on the Frankfurt exchange, a proxy for market growth. The tick size dummy is meant to
capture the impact on liquidity of the reduction in tick size implemented in all Euronext
exchanges in 2007. We introduce a GDP per capita measure because it may drive the
volume traded in each of the four Euronext exchanges. Increases in volume may have an
impact on liquidity and, hence, on bid-ask spreads. Finally, the volume traded at MTFs
may also have had an impact on the liquidity of the regulated exchanges that integrated
Euronext and thus on their bid-ask spreads. The sign of this variable may be negative (if it
proxies an increase in overall traded volume) or positive (if MTFs divert significant
liquidity out of the regulated exchanges).
• Xit is a vector of dummy variables that controls for some relevant economic and
political events. These events may have affected the liquidity of the Euronext
exchanges before and after the creation of Euronext (see the list of events
considered in Annex 2).
• η i is a vector of fixed effects: one per security. These dummies are introduced to
capture security-specific factors that may influence the liquidity of those
securities and that are independent of the process of integration.
• λt is a vector of monthly fixed effects. These dummies control for monthly-
specific shocks that may have affected liquidity in the stock exchange markets
under consideration and that have nothing to do with the process of integration.
• ε it denotes the standard statistical error.
This panel data model is estimated using ordinary least squares (OLS). We calculate
robust standard errors, clustering at the security level to allow for heteroskedasticity and
autocorrelation of the errors. Because the creation of Euronext was triggered by an
exogenous policy decision, we can safely place a causal interpretation on the econometric
estimates for the Integration dummy, provided other relevant changes in the economic
environment are controlled for. Causality runs from the integration events to the
estimated changes in liquidity. 21
Econometric results
This Section reports the results of the econometric estimation of the basic model
described above. 22 Table D.1 (Annex D) presents the results of our empirical analysis
using the Bloomberg measure of the daily bid-ask spreads of the securities included in the
main indices of the Amsterdam, Brussels, Lisbon and Paris stock exchanges. Column (1)
describes the impact of integration on the average bid-ask spread of the securities listed in
those exchanges. Columns (2) and (3) replicate the model in Column (1) controlling for
changes in the volatility of the DAX index 23 and in the volume traded on the Frankfurt
exchange. These controls are added to take account of potential liquidity trends that are
unrelated to the creation of Euronext. Column (4) also includes the effect of the Euronext
tick size reduction in 2007, and Columns (5) and (6) control in addition for the entry and
growth of MTFs and changes in per capita GDP in each of the four Euronext countries.
Once again, the logic behind these controls is to isolate the liquidity impact of the
creation of Euronext and avoid confounding it with the effects of these other variables.

The regressions in all columns include monthly dummies, security dummies and
dummies controlling for a few salient events that may have affected the behavior of bid-
ask spreads in the relevant exchanges. Across all specifications we find that the average
bid-ask spreads of the securities included in the main indices of the Paris, Brussels,
Amsterdam and Lisbon stock exchanges fell as a result of the creation of Euronext. This
effect is statistically significant in Columns (1) to (3) which include controls for changes
in the volatility of the securities listed in the DAX and traded volumes on the Frankfurt
exchange. Both of these control variables have the expected sign (positive for volatility
and negative for traded volumes) and are statistically significant.
However, when we include the indicator for the change in the tick size, the growth of
MTFs and GDP per capita as controls, the estimated impact of the integration continues
to be negative but is no longer statistically significant. Each of the additional control
variables has an impact on bid-ask spreads that is consistent with finance and economic
theory. The tick size reduction led to a reduction in the bid-ask spread as did the
increasing volume of trades on MTFs and the GDP per capita.
The loss of statistical significance of the integration dummy in Columns (4) to (6) should
not be a matter of concern, as is most likely due to multicollinearity. 24 A way to test for
this is to disaggregate the impact of integration to consider the changes in bid-ask spreads
resulting from each of the three steps in the creation of Euronext. The sequential nature of
Euronext’s integration process allows the empirical analysis to control in part for spurious
correlations that could bias the estimation of the impact of integration.
This can be done in two alternative ways. First, we define three different integration
dummies: Phase 1 (which equals 1 for any security i and period t after the integration of
Brussels with Paris if security i is traded either in Brussels or Paris, and 0 otherwise);
Phase 2 (which equals 1 for any security i and period t after the integration of Amsterdam
if security i is traded either in Brussels, Paris or Amsterdam, and 0 otherwise), and Phase
3 (which equals 1 for any security i and period t after the integration of Lisbon if security
i is traded either in Brussels, Paris, Amsterdam or Lisbon, and 0 otherwise). This
approach makes it easier to disentangle the liquidity impact of the integration from the
effects of other unrelated changes that may have occurred post-merger.
Table D.2 (Annex D) presents the results of this alternative modelling approach. We find
a statistically significant and material decline of the average bid-ask spreads of the
securities included in the main indices of the Paris, Brussels, Amsterdam and Lisbon
stock exchanges as a result of the creation of Euronext under all specifications (i.e., in
Columns (1) to (6)). In particular, Phase 1 and Phase 3 are statistically significant even
when we include the indicator for the change in the tick size, the growth of MTFs and
GDP per capita as controls. Note also that the estimated coefficients of all of the control
variables continue to be statistically significant and have signs which are consistent with
economic and finance theory. The estimated coefficients of the three phase variables in
Columns (5) and (6) imply that the creation of Euronext has led to a non-transitory
reduction in bid-ask spreads of approximately 50%. Columns (5) and (6) also show that
the largest decline occurred when the Brussels and Paris exchanges were integrated. The
subsequent integration of the Amsterdam and Lisbon exchanges had a smaller impact on
the bid-ask spreads.
An alternative approach is to replace the integration dummy in Table D.1 by four
country-specific integration dummies: Paris (which takes a value of 1 for any security i
traded in Paris and period t after the integration of Brussels with Paris, and 0 otherwise);
Brussels (which takes a value of 1 for any security i traded in Brussels and period t after

the integration of Brussels with Paris, and 0 otherwise); Amsterdam (which takes the
value of 1 for any security i traded in Amsterdam and period t after the integration of
Amsterdam in the Euronext platform, and 0 otherwise); and Lisbon (which takes the
value of 1 for any security i traded in Lisbon and period t after the integration of Lisbon
in the Euronext platform, and 0 otherwise). These variables may capture the differential
effect of integration on the Paris, Brussels, Amsterdam and Lisbon markets. This is
important since the liquidity impact of Euronext’s creation may have been different in the
various exchanges, reflecting differences, among other things, in size, depth and breadth.
Table D.3 (Annex D) presents the results of this alternative modelling approach. We find
that the negative effect of integration on the average bid-ask spread identified in Table
D.2 is largely driven by the effect of integration on the liquidity of the securities listed in
the CAC 40 and the BEL 20. Note that this is true even after controlling for the change in
the tick size in 2007, the entry and subsequent growth of MTFs, and GDP per capita.
From Columns (4) and (5), we observe that the average bid-ask spread of the securities in
the CAC 40 fell approximately 59% as a result of integration. The bid-ask spread of the
securities in the BEL20 fell approximately 25%. These effects are material and
statistically significant. The results for Amsterdam are not so clear cut, however. We find
that while the impact of integration on the bid-ask spreads of the securities listed in the
Amsterdam index was to reduce spreads, the relation is not statistically significant.
Finally, we note that integration led to an increase of the bid-ask spreads in Lisbon. 25
4. Robustness tests
In this section we report the results of several robustness tests. 26 First, we repeat the
various analyses in Section III using different integration milestones: we employ as
relevant cut offs the dates at which the trading platforms of the different exchanges were
integrated, as opposed to the dates at which their clearing platforms were integrated.
Second, we investigate the impact of the creation of Euronext on alternatives measures of
liquidity: volatility and volume. Third, we present the results of our econometric analysis
adding the price of the securities and market capitalisation as additional explanatory
variables. The results of these robustness checks confirm the main findings of Section III,
namely that the creation of Euronext increased the liquidity of the merging exchanges
and, therefore, reduced the implicit costs of trading. The increase in liquidity is reflected
in lower bid-ask spreads even after using alternative integration dates. It also results in
lower volatility and higher volume.
Alternative integration milestones

Using Bloomberg’s bid-ask spread data, we analyse the impact of the creation of
Euronext on liquidity using the dates of trading platform integration as the cut off points
that separate the three different phases of the creation of Euronext: the merger of Paris
and Brussels, the integration of Amsterdam and the integration of Lisbon. We employ the
same methodology and control variables as in section III, but for expositional simplicity
restrict attention to the regression using the Phase 1, Phase 2 and Phase 3 dummies as
dependent variables.
Table E.1 presents the results of the econometric analysis. As above we comment the
results reported in Columns (5) and (6) only, because they include all relevant controls.27
The three integration dummies have a negative sign, indicating that each of the three
exchange mergers had a positive impact on liquidity and, hence, led to a reduction in the
implicit costs of trading. The estimates of the coefficients for Phase 1 and Phase 3 are

statistically significant. While the coefficient for the Phase 2 dummy is not statistically
significant, this does not necessarily imply that the merger of Amsterdam had no liquidity
impact. This is because the integration of Amsterdam into Euronext took place only five
months after the integration of Paris and Brussels and, as a result, our model may not be
able to estimate with sufficient precision the effect of Phase 2 of the integration process.
The largest decline in bid-ask spreads occurred at the time of the integration of the Paris
and Brussels exchanges.
Alternative measures of liquidity

We analyse the impact of the creation of Euronext on two additional liquidity measures:
volatility and volume. 28
Impact on volatility
Other things equal, markets with a large number of traders (i.e., thick markets) are less
volatile than thinner markets. Larger and more stable order flows in thick markets reduce
the noise induced by individual orders, since they tend to average out and, therefore, to
exert less pressure on prices. Moreover, thick markets have a tighter bid-ask spread and
thus the “bid-ask price bounce” induced by large orders is smaller. In addition, the price
concession necessary to execute a large order is smaller in thick markets because there is
a greater likelihood of finding a trading counterparty. For all these reasons, a merger
between exchanges that results in a thicker market should lead also to lower volatility. 29
Following Pagano and Padilla (2005b), we analyse the impact of integration on volatility
using 20-day historical volatility data for the securities included in the CAC 40, BEL 20,
AEX, and PSI. The source of this data is Bloomberg. We have data on a daily basis for
the period between 3 January 2000 and 31 December 2010. The number of observations
is 365,335. We use the same econometric methodology employed in section III. We
include all controls used above plus, in addition, the historical volatility of the CAC 40,
BEL 20, AEX, and PSI indices. We introduce this variable as an additional way to isolate,
to the extent possible, the effect of integration on volatility from other confounding
factors such as shocks to the global or European economy, or shocks that are
idiosyncratic to the exchanges considered but are not related to the integration process.30
Table E.2 presents the results of the econometric analysis of the impact on volatility of
the creation of Euronext using Integration as the dependent variable. We find that the
historical volatility of the large-cap securities traded in Paris, Brussels, Amsterdam and
Lisbon fell as a result of the creation of Euronext. This effect is statistically significant in
all specifications. It is also material from an economic viewpoint. According to the
estimation in Columns (6) and (7), which are the ones that we prefer given that they
include all relevant controls, volatility fell on average approximately 9% once the
integration of the four exchanges was completed.
Impact on volume
We also analyse the impact of the creation of Euronext on traded volume, measured for
the purposes of this analysis by the number of shares traded for the securities included in
the CAC 40, BEL 20, AEX, and PSI. The number of shares traded for these securities has
been obtained from Bloomberg. We have data on a daily basis for the period between 3
January 2000 and 31 December 2010. The number of observations is 382,146. Once
again we use the same methodology and the same control variables as in section 3.

Table E.3 presents the results of the econometric analysis. We find that traded volume in
the Paris, Brussels, Amsterdam and Lisbon exchanges increased as a result of the creation
of Euronext. This effect is statistically significant. It is also material from an economic
viewpoint. According to the estimations in Columns (5) and (6), which are the ones that
we prefer given that they include all relevant controls, volume increased by
approximately 25% in the period after the integration. A thicker market (i.e., a market
with more traders and greater traded volume) is a more liquid market. 31 Therefore, our
findings on the effect of the Euronext mergers on traded volume confirm our previous
results on bid-ask spreads and volatility: the Euronext mergers increased liquidity.
Additional control variables

The regression models described above are used to estimate the impact of integration on
the average bid-ask spread of the securities listed in those exchanges controlling for
changes in the volatility of the DAX index, the volume traded on the Frankfurt exchange,
the effect of the Euronext tick size reduction in 2007, the entry and growth of MTFs and
changes in per capita GDP. These controls are included in the regression model to isolate
the liquidity impact of the creation of Euronext from the effect of these other variables on
the bid-ask spread. As a further robustness test on the results, we re-estimated our models
including the price of the securities and market capitalisation as additional explanatory
variables. 32 The detailed regression results are shown in Tables E.4 to E.9 in Annex E
below. We find that the inclusion of theses variables does not alter the conclusions of the
analysis reported by the Parties. In particular, we continue to find that the integration of
Euronext’s clearing and trading platforms led to a statistically significant and
economically material increase in liquidity, as measured by the (normalised) bid-ask
spread.
5. The NYSE- Euronext merger
The NYSE- Euronext merger took place in April 2007. In this section, we explore the
impact of the NYSE-Euronext merger in April 2007 on the bid-ask spreads of the
Euronext exchanges. We would expect to find no statistically significant impact of the
merger on bid-ask spreads, given that the merger did not involve the integration of the
trading and/or clearing platforms of NYSE and Euronext. We use the same methodology
and the same control variables as in section 3, except that we add a dummy variable
(NYSE merger) that takes the value of one after 4 April 2007 and zero otherwise. We
restrict the sample to three years before and after the NYSE-Euronext merger to isolate
the impact of this event. Estimation results are presented in Table F.1 (Annex F). 33 We
find no effect of the merger once we control for the tick size reduction and the entrance of
MTFs. This implies that the liquidity effects that we have identified in this paper are not
due to a mere change in ownership but rather the consequence of the integration of the
underlying trading and clearing platforms of the merging exchanges.
6. Identification and causality
Our econometric results show that exchange mergers that result in the integration of the
underlying trading and clearing platforms produce material liquidity effects, which reduce
the implicit cost of trading and thus ought to benefit market participants and offset the
potentially adverse impact of the merger on exchange fees (i.e. the explicit cost of
trading). However, before these results can be extrapolated to other mergers across stock
changes, a few comments on endogeneity and causality are in order.

First, the multi-stage nature of the Euronext integration process –with three sequential
mergers– makes it possible in our opinion to identify the liquidity impact of stock
exchange mergers. In particular, we agree with Pagano and Padilla (2005b) and Nielsson
(2009) that the staggered introduction of merger events across the four participating
exchanges allows the empirical estimation to deal more rigorously with spurious
correlation.
Second, to the best of our knowledge, the timing of the four mergers was predetermined
at the outset and there were no departures from the merger plan. Therefore, we believe
that there are no reasons to doubt the causal interpretation we have given to our
regression results. We find no reason to be concerned about reverse causality and
spurious correlation. There is no evidence that liquidity increased in the years prior to the
merger. There is also no evidence that a third omitted factor triggered the mergers and the
change in liquidity.
In particular, there is no evidence of a downward trend in the data, 34 as we proceed to
discuss. Note first that if there was an omitted trend, we would expect the residuals of a
model like those reported in Section 3 which excluded the integration dummies,
Integrationit, to show a continuously declining trend. However, as shown in Figure G.1 in
Annex G, this is not the case. (Dotted lines show the integration dates.) The time
evolution of the residuals (the bid-ask component not explained by all relevant controls
except the merger integration indicators) reveals that the main trends present in the
original data are properly captured by the control variables included in the models
presented in Section III. The difference between actual and predicted bid-ask spreads
follow a stable pattern during the pre-merger period and then during the post-merger.
However, it falls significantly below their pre-merger mean value once exchanges are
integrated into Euronext, indicating the presence of a level shift following the mergers.
Thus, the analysis of the difference between actual and predicted bid-ask spreads does not
show a downward trend prior to the integration of the Euronext exchanges. On the
contrary, the graphical analysis show a different evolution of the bid ask spreads before
(fluctuating around a stable mean) and after (decreasing over time) the integration of the
exchanges. In other words, it appears to require the introduction of step functions like the
integration dummies in the models of Section III.
We have tested for the existence of an omitted trend indicating a general trend toward
increasing liquidity that was unrelated to the Euronext integration more formally. In
particular, we have modified the models in Section III above by removing the integration
dummies, Integrationit, and introducing instead a series of quarter-year fixed effects for
each exchange. That is, for each exchange, we have introduced as many dummy variables
as quarters in the sample; each quarter dummy takes a value of 1 in that quarter and 0
otherwise. We have then estimated the exchange by exchange, instead of pooling all
exchanges into a single regression. The results are consistent with those in Section III
above. 35 Figure G.2 in Annex G shows the results of the estimated quarterly fixed effects
of the modified. None of these estimates shows a downward trending pattern, which
further confirms that the effects of the Euronext mergers are not picking up an omitted
long-term trend.
Third, the mergers that gave rise to Euronext involved exchanges with a similar structure.
They were all hybrid markets with limit order book emphasis. They had all introduced an
order driven, electronic, continuous market at the time of the merger. Therefore, the
liquidity impact we have identified cannot be attributed to changes in market structure.

Fourth, while Amsterdam had demutualised in 1997, a few years before its integration in
Euronext, the other three mergers demutualised as part of the merger. This may raise
doubts about whether the liquidity impact that we have attributed to the mergers is instead
the effect of demutualisation. We do not believe that this alternative explanation is
correct. While the economic literature has found that demutualisation is likely to have an
impact on the liquidity of the newly demutualised exchange, 36 there is no evidence of
effects across exchanges. However, we find evidence that each sequential merger had a
positive impact on the liquidity of the Paris and Brussels exchanges. We also find
evidence that the integration process increased liquidity in Amsterdam, which as noted
before had demutualised prior to the merger.
Fifth, our results on the liquidity effect of the merger cannot be attributed to tick size
harmonisation. This is for the following reasons: (a) the Paris exchange – which benefited
most from the merger in terms of increased liquidity – introduced new tick sizes in 1999,
before the start of the integration; (b) Amsterdam and Lisbon aligned their tick sizes to
the Paris model in dates that did not overlap with the merger dates; (c) while changes in
tick size may have an impact on the liquidity of the stock exchange where the tick change
occurs, we find evidence that each merger had an impact on the other participating
exchanges; and (d) we find a permanent effect of each phase of integration even after
controlling for the tick change of 2007, which does not square with an alternative
interpretation that attributes the liquidity effects of the creation of integration to the
process of tick size harmonisation that run parallel to the integration process.
Sixth, the Euronext integrations pre-dated the introduction of MTFs. The effects that the
model identifies are therefore clearly attributable to the mergers. However, our
econometric analysis of efficiencies in the cash market also indicates that the introduction
and subsequent growth of MTFs led to a statistically significant increase in liquidity, i.e. a
reduction in bid-ask spreads and volatility and an increase in traded volume. There is no
contradiction between the positive effects of exchange fragmentation, which results in
increasing competition for a given security and, hence, a possible reduction in the explicit
cost of trading and integration, and exchange integration, where different securities traded
in different venues are pooled together and distributed to a wider set of traders.
7. Concluding remarks
Stock exchanges are platforms that co-ordinate traders willing to sell with those willing
to buy. Because traders in either side can be inefficiently rationed and not all traders
provide good matchings to their potential counterparts, stock exchanges are clear-cut
examples of multi-sided platforms. Therefore, mergers between exchanges need not lead
to higher prices and, on the contrary, are likely to benefits all, or some, of the market
participants by increasing liquidity. In this paper we have shown that the efficiency
effects of mergers in multi-sided markets, such as stock exchanges, are not merely
theoretical and can be assessed using standard econometric techniques. Note finally that
while some of these efficiencies might have been clawed back in the form of higher
trading fees, a significant share of them must have been appropriated by the users of
Euronext. This would be true in a one-sided market, since not even a monopolist would
normally be able to fully appropriate these demand-side efficiencies, but is even more so
in multi-sided markets, where post-merger price competition may be fiercer.
This paper illustrates how the efficiencies created by the merger of two or more platforms
can be estimated empirically ex post. The so-called post-mortem approach to the
quantification of horizontal merger efficiencies requires estimating the link between past

concentrations and platform measures which directly or indirectly capture the magnitude
of the access and usage externalities benefiting users on both sides of the platform. As we
have seen above, this is a complex exercise because it requires controlling for possible
confounding factors, taking into account the potential endogeneity of the mergers,
performing robustness tests, etc. Extrapolating the results of ex-post analyses of this sort
when reviewing a new merger is also challenging, since not all mergers are equal and the
market context where the past mergers took place may not resemble that applying to the
new transaction. However, none of this means that this approach has no value. The
alternative is to simulate the impact of the platform merger on users’ utilities or profits.
This requires estimating demand functions on both sides of the market, including direct
and indirect network effects, which is a much more complex exercise. Besides the usual
complexity in demand estimation, these simulations must take account of the degree of
interoperability across the merging platforms that existed pre-merger and of the
prevalence of multi-homing in one or more market sides .

Annex A. Descriptive statistics
Table A.1 provides descriptive statistics on the (normalised) bid-ask spreads provided by
Bloomberg.
Table A.1. Descriptive statistics for the Bloomberg-based bid-ask spreads of large caps in
Paris, Brussels, Amsterdam and Lisbon, 3 January 2000 – 31 December 2010here
Number of
Index observations Average Standard deviation Minimum Maximum
Amsterdam (AEX) 98,613 0.012 0.052 0 1.887
Belgium (BEL) 69,892 0.005 0.013 0 1.78
Paris (CAC) 114,825 0.002 0.003 0 0.479
Lisbon (PSI) 78,773 0.012 0.060 0 1.995
Source: Bloomberg e.
Figure A.1. Estimated year-month fixed effects – Bid-ask spread for AEX, BEL, CAC, and
PSI securities. Jan 2000-Dec 2010
Amsterdam, AEX Belgium, BEL

-5
-5
-5.5
Month-year fixed effects
-5.5
-6
-6
-6.5
-6.5
-7 -7
03jan2000
27apr2001
17apr2003
06apr2005
30aug2000
20aug2002
09aug2004
30jul2006
19jul2008
09jul2010
23dec2001
13dec2003
02dec2005
22nov2007
11nov2009
27mar2007
16mar2009
06mar2011
03jan2000
27apr2001
17apr2003
06apr2005
30aug2000
20aug2002
09aug2004
30jul2006
19jul2008
09jul2010
23dec2001
13dec2003
02dec2005
22nov2007
11nov2009
27mar2007
16mar2009
06mar2011
Paris, CAC Portugal, PSI

-4.8
-6
-5
-6.5
-5.2
-7
-5.4
-7.5
-5.6
-8
03jan2000
27apr2001
17apr2003
06apr2005
30aug2000
20aug2002
09aug2004
30jul2006
19jul2008
09jul2010
23dec2001
13dec2003
02dec2005
22nov2007
11nov2009
27mar2007
16mar2009
06mar2011
03jan2000
27apr2001
17apr2003
06apr2005
30aug2000
20aug2002
09aug2004
30jul2006
19jul2008
09jul2010
23dec2001
13dec2003
02dec2005
22nov2007
11nov2009
27mar2007
16mar2009
06mar2011
Note: The vertical lines indicate the different consolidation dates of the Paris, Brussels and Amsterdam
exchanges into Euronext. The first line shows the integration of the Paris and Brussels exchanges, the second
one the integration of the Amsterdam exchange and the third one, the integration of the Lisbon exchange..
Source: Bid-ask spreads calculated using price data provided by Bloomberg.

Annex B. List of events
April 18, 2000 Crash of high-tech share values

May 3, 2001 New economic regulation in France - financial, competition and
enterprise regulations
September 11, 2001 Terrorist attacks in New York and Washington D.C.
October 8, 2001 Invasion of Afghanistan
December 3, 2001 Enron bankruptcy filed and Argentine financial crisis
October 14, 2002 Bali terrorist attack
March 21, 2003 Invasion of Iraq
March 11, 2004 Terrorist attacks in Madrid
May 29, 2005 Rejection of European Constitution by France
July 7, 2005 London terrorist bombings
October 27, 2005 French riots
May 2006 Bird flu outbreak
July 12, 2006 War in Lebanon
October 24, 2007 Merrill Lynch announces $8.4 billion loss
March 16, 2008 Bear Stearns acquired by JPMorgan Chase
September 6, 2008 Fannie Mae & Freddie Mac acquired by US Government
September 15, 2008 Lehman Brothers bankruptcy
September 16, 2008 Loan to AIG to avoid bankruptcy
October 3, 2008 TARP bill enacted with $700 billion in bailout funds
October 8, 2008 UK bailout package worth £500 billion
December 11, 2008 Madoff arrested for Ponzi scheme
January 18, 2009 RBS announces largest corporate loss in UK history
August, 2009 H1N1 flu
August 7, 2008 War in Georgia, Russia
November 26, 2009 Dubai defers debt
April 15, 2010 Iceland volcanic ash
May 2, 2010 Greek €110 billion loan agreement reached

Annex C. Dataset description
Table C.1. Dataset description
Variable Description Data Source Mean Std. Deviation Min Max

Dependent Variables
The normalised difference
between the daily closing ask
Normalised bid- price and the daily closing bid Bloomberg
0.01 0.04 0 2.00
ask spread price for each of the constituent (1)
securities of the CAC 40, the BEL

20, the AEX and the PSI indices.
Number of The daily number of shares traded
shares of each of the constituent Bloomberg
2.31 4.84 0 309.84
(Millions of securities of the CAC 40, the BEL (1)
trades) 20, the AEX and the PSI indices.

The annualised standard deviation
of the daily returns of each of the
constituent securities of the CAC
20-Day historical Bloomberg
40, the BEL 20, the AEX and the 0.22 0.23 0 5.62
volatility (1)
PSI indices over a 20 day window.
Returns are computed using last
prices.
Explanatory variables:
of the daily returns of the DAX
DAX volatility index over a 20 day window. Bloomberg 0.14 0.08 0.04 0.51
Returns are computed using last
prices.(3)
of the daily returns of the
FTSE100
FTSE100 index over a 20 day Bloomberg 0.12 0.07 0.03 0.52
volatility
window. Returns are computed
using last prices.
Traded volume
Monthly number of shares traded
on the Frankfurt
on the Frankfurt exchange. It Deutsche
exchange 771.92 252.15 328.1 1836.23
corresponds to the traded volume Börse
(Millions of
registered at Xetra.
trades)
Daily total number of shares of
MTF volume
CAC 40, BEL20, AEX and PSI
(Millions of Bloomberg 44.21 36.65 0 266.03
securities traded in Chi-X and
trades)
Bats.(4)
Per capita GDP Yearly, Euros per inhabitant Eurostat
France 24,627 638 23,700 25,600
Belgium 25,872 958 24,600 27,200
Netherlands 27,672 1,256 26,300 29,700
Portugal 12,627 179 12,400 12,900
Notes: (1) Data includes all securities that have composed each of the main indices at any point in time during
the sample period. Ask price mnemonic: Px_Ask; bid price mnemonic: Px_Bid; volume mnemonic:
Px_Volume; last price mnemonic: Px_Last.
(2) There are 17,295 observations with a zero bid-ask spread.
(3) There are no last prices for the DAX index on the 24th and 31st of December of each year.
(4) Statistics are calculated over the period with positive MTF volumes (from April 2007 onwards).

Annex D. Econometric results – Baseline
Table D.1. Impact of integration on the normalised bid-ask spreads of large caps in Paris,
Brussels, Amsterdam and Lisbon, 3 January 2000 – 31 December 2010
Ln (bid-ask spread) 1 2 3 4 5 6
Integration -0.590*** -0.530*** -0.119** -0.071 -0.068 -0.019
[0.000] [0.000] [0.024] [0.174] [0.193] [0.698]
DAX volatility (log of) 0.245*** 0.365*** 0.406*** 0.418*** 0.359***
[0.000] [0.000] [0.000] [0.000] [0.000]
Traded volume on the Frankfurt exchange -0.911*** -0.314*** -0.307*** -0.166***
(log of) [0.000] [0.000] [0.000] [0.000]
Tick change dummy -0.519*** -0.322*** -0.047
[0.000] [0.000] [0.590]
Per capita GDP -4.859***
[0.000]
MTF volume (log of) -0.012** -0.022***
[0.016] [0.000]
Constant -4.666*** -4.146*** 16.643*** 3.243*** 3.076*** 49.412***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Month fixed effects Yes Yes Yes Yes Yes Yes
Security fixed effects Yes Yes Yes Yes Yes Yes
Observations 362,103 357,936 332,831 332,832 332,831 332,831
R-squared 0.523 0.533 0.570 0.590 0.599 0.603
Notes:
(a) Robust p-value in brackets, clustered by security to allow for heteroskedasticity and autocorrelation within
securities. Estimation residuals are stationary according with the Fisher stationary test for panel regressions.
See Maddala, G.S. and S. Wu (1999) “A comparative study of unit root tests with panel data and a simplified
test”, Oxford Bulleting of Economics and Statistics, pp. 631-652.
(b) * significant at 10%; ** significant at 5%; *** significant at 1%.
(c)The sample is composed by 158 large caps. It includes securities that have composed the main index of the
Paris, Brussels, Amsterdam and Lisbon exchanges (the CAC 40, BEL20, AEX and the PSI) at any point
throughout the sample period.
(d) Bid-ask spreads calculated using price data provided by Bloomberg.

Brussels, Amsterdam and Lisbon by phases, 3 January 2000 – 31 December 2010
Phase 1 -0.344*** -0.356*** -0.14 -0.238** -0.241** -0.259**
[0.004] [0.003] [0.219] [0.031] [0.029] [0.016]
Phase 2 -0.155 -0.168 -0.187* -0.174* -0.175* -0.125
[0.160] [0.120] [0.050] [0.065] [0.062] [0.115]
Phase 3 -0.570*** -0.519*** -0.310*** -0.172*** -0.164*** -0.117**
[0.000] [0.000] [0.000] [0.000] [0.000] [0.016]
[0.000] [0.000] [0.000] [0.000] [0.000]
Traded volume on the Frankfurt
-0.642*** -0.177*** -0.173*** -0.110***
exchange
(log of) [0.000] [0.000] [0.000] [0.002]
Tick change dummy -0.461*** -0.332*** -0.180*
[0.000] [0.000] [0.053]
Per capita GDP -2.669**
[0.047]
MTF volume(log of) -0.008 -0.014**
[0.106] [0.018]
Constant -4.530*** -4.304*** 10.500*** 0.08 0.001 25.781*
[0.000] [0.000] [0.000] [0.921] [0.999] [0.054]
Observations 362,103 357,936 332,831 332,831 332,831 332,831
R-squared 0.558 0.563 0.597 0.606 0.606 0.607
Notes:
(c) The sample is composed by 158 large caps. In particular, we include securities that have composed the
main index of the Paris, Brussels, Amsterdam and Lisbon exchanges (the CAC 40, BEL20, AEX and the PSI)
at any point throughout the sample period.

Brussels, Amsterdam and Lisbon by exchange, 3 January 2000 – 31 December 2010
Paris -1.119*** -1.073*** -0.586*** -0.594*** -0.592*** -0.561***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Brussels -0.757*** -0.724*** -0.247** -0.257** -0.256** -0.143
[0.000] [0.000] [0.017] [0.012] [0.012] [0.182]
Amsterdam -0.491*** -0.432*** -0.147 -0.085 -0.081 0.023
[0.003] [0.008] [0.306] [0.549] [0.563] [0.851]
Lisbon -0.127 -0.029 0.247*** 0.349*** 0.356*** 0.287***
[0.101] [0.722] [0.002] [0.000] [0.000] [0.000]
[0.000] [0.000] [0.000] [0.000] [0.000]
Traded volume on the Frankfurt exchange -0.900*** -0.262*** -0.253*** -0.146***
(log of) [0.000] [0.000] [0.000] [0.000]
[0.000] [0.000] [0.178]
Per capita GDP (log of) -3.800***
[0.001]
MTF volume (log of) -0.015*** -0.021***
[0.005] [0.000]
Constant -4.777*** -4.184*** 16.449*** 2.111*** 1.909** 38.133***
[0.000] [0.000] [0.000] [0.008] [0.016] [0.001]
Observations 362,103 357,936 332,831 332,831 332,831 332,831
R-squared 0.534 0.545 0.592 0.592 0.607 0.609
Notes:
(c) The sample is composed by 158 large caps. It includes securities that have composed the main index of
the Paris, Brussels, Amsterdam and Lisbon exchanges (the CAC 40, BEL20, AEX and the PSI) at any point

Annex E. Econometric results – Robustness
Alternative integration milestones
Table E.1. Impact of integration of trading platforms on the normalised bid-ask spreads of
large caps in Paris, Brussels, Amsterdam and Lisbon, 3 January 2000 – 31 December 2010
Phase 1 -0.407*** -0.405*** -0.422*** -0.314*** -0.316*** -0.305***
[0.001] [0.001] [0.000] [0.004] [0.004] [0.006]
Phase 2 -0.059 -0.086 0.071 -0.098 -0.102 -0.089
[0.576] [0.400] [0.402] [0.252] [0.235] [0.270]
Phase 3 -0.657*** -0.610*** -0.414*** -0.264*** -0.256*** -0.179***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
[0.000] [0.000] [0.000] [0.000] [0.000]
DB volume (log of) -0.659*** -0.183*** -0.178*** -0.111**
[0.000] [0.000] [0.000] [0.020]
[0.000] [0.000] [0.101]
Per capita GDP -3.089**
[0.034]
MTF volume(log of) -0.008 -0.015**
[0.120] [0.015]
Constant -4.538*** -4.301*** 10.718*** 0.211 0.122 30.121**
[0.000] [0.000] [0.000] [0.745] [0.853] [0.032]
Observations 362,103 357,936 332,831 332,831 332,831 332,831
R-squared 0.557 0.561 0.596 0.605 0.605 0.606
Notes:
(c)The sample is composed by 158 large caps. It includes securities that have composed the main index of the
Paris, Brussels, Amsterdam and Lisbon exchanges (the CAC 40, BEL20, AEX and the PSI) at any point

Alternative measures of liquidity: volatility
Table E.2. Impact of integration on 20 day-historical volatility of large caps in Paris,

Brussels, Amsterdam and Lisbon by phases, 3 January 2000 – 31 December 2010
Ln (volatility) 1 2 3 4 5 6 7
Integration -0.187*** -0.062** -0.122*** -0.071*** -0.085*** -0.088*** -0.085***
[0.000] [0.025] [0.000] [0.005] [0.001] [0.000] [0.001]
[0.000] [0.000] [0.000] [0.000] [0.000]
Index volatility (log of) 0.588***
[0.000]
Traded volume on the Frankfurt
exchange 0.211*** 0.012 -0.001 0.006
(log of) [0.000] [0.544] [0.979] [0.770]
Tick change dummy 0.177*** -0.114*** -0.100**
[0.000] [0.003] [0.029]
Per capita GDP (log of) -0.251
[0.632]
MTF volume(log of) 0.018*** 0.018***
[0.000] [0.000]
Constant -1.550*** -0.243*** -0.140*** -5.090*** -0.616 -0.338 2.075
[0.000] [0.000] [0.001] [0.000] [0.193] [0.481] [0.691]
Month fixed effects Yes Yes Yes Yes Yes Yes Yes
Security fixed effects Yes Yes Yes Yes Yes Yes Yes
Observations 365,335 363,248 365,335 336,252 336,252 336,252 336,252
R-squared 0.275 0.470 0.512 0.497 0.505 0.507 0.507
Notes:
(b) * significant at 10%; ** significant at 5%; *** significant at 1%
main index of the Paris, Brussels, Amsterdam and Lisbon exchanges (the CAC 40, BEL20, AEX and the PSI)
(d) 20-Day historical volatility calculated using last prices provided by Bloomberg.

Alternative measures of liquidity: traded volume
Table E.3. Impact of integration on number of shares traded for large caps in Paris,
Brussels, Amsterdam and Lisbon, 3 January 2000 – 31 December 2010
Ln (number of shares) 1 2 3 4 5 6
Integration 0.607*** 0.244*** 0.271*** 0.253*** 0.253*** 0.254***
[0.000] [0.001] [0.000] [0.000] [0.000] [0.000]
Per capita GDP (log of) 9.117*** 9.359*** 6.876*** 5.852*** 5.812***
[0.000] [0.000] [0.000] [0.005] [0.007]
Traded volume on the Frankfurt exchange (log of) 0.403*** 0.293*** 0.296***
[0.000] [0.000] [0.000]
DAX volatility (log of) 0.105*** 0.053* 0.030 0.032
[0.001] [0.068] [0.319] [0.270]
Tick change dummy 0.149 0.182
[0.119] [0.216]
MTF volume (log of) -0.002
[0.820]
Constant 9.373*** -83.758*** -86.048*** -69.931*** -57.031*** -56.677***
[0.000] [0.000] [0.000] [0.000] [0.006] [0.007]
Observations 382,146 382,146 377,403 349,152 349,152 349,152
R-squared 0.760 0.771 0.774 0.783 0.783 0.783
Notes:
main index of the Paris, Brussels, Amsterdam and Lisbon exchanges (he CAC 40, BEL20, AEX and the PSI)
(d) Number of shares traded provided by Bloomberg.

Additional control variables
The table below presents the results of the econometric analysis of the impact of the
integration by phases on the normalised bid-ask spreads when the daily market
capitalisation is included as an additional control.
Table E.4. Impact of integration on the normalised bid-ask spreads of large caps in Paris,
Brussels, Amsterdam and Lisbon, controlling for market capitalisation,
by phases, 3 Jan 2000 – 31 Dec 2010
Phase 1 -0.227*** -0.215*** -0.094 -0.183*** -0.193*** -0.191***
[0.000] [0.001] [0.125] [0.002] [0.001] [0.001]
Phase 2 -0.402*** -0.400*** -0.390*** -0.372*** -0.384*** -0.389***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Phase 3 -0.327*** -0.353*** -0.198*** -0.078* -0.042 -0.045
[0.000] [0.000] [0.000] [0.054] [0.290] [0.308]
DAX volatility (log of) -0.055* 0.038 0.114*** 0.152*** 0.153***
[0.051] [0.123] [0.000] [0.000] [0.000]
Traded volume on the -0.439*** -0.028 -0.005 -0.011
Frankfurt exchange (log of) [0.000] [0.319] [0.847] [0.690]
Tick change dummy -0.410*** 0.143** 0.131**
[0.000] [0.026] [0.035]
Per capita GDP (log of) 0.234
[0.805]
MTF volume (log of) -0.036*** -0.035***
[0.000] [0.000]
Market capitalisation (log of) -0.618*** -0.626*** -0.604*** -0.592*** -0.612*** -0.614***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Constant 0.647* 0.602* 10.522*** 1.182** 0.868 -1.39
[0.064] [0.069] [0.000] [0.032] [0.119] [0.881]
Observations 347,837 345,605 329,145 329,145 329,145 329,145
R-squared 0.625 0.627 0.642 0.65 0.652 0.652
Notes: (a) Robust p-value in brackets, clustered by security to allow for heteroskedasticity and autocorrelation
within securities; (b) * significant at 10%; ** significant at 5%; *** significant at 1%; (c) the sample is
composed by 158 large caps. In particular, we include securities that have composed the main index of the
Paris, Brussels, Amsterdam and Lisbon exchanges (the CAC-40, BEL-20, AEX and the PSI) at any point
throughout the sample period; (d) all regressions include a set of single-day event dummies; (e) bid-ask
spreads calculated using price data provided by Bloomberg.

integration by exchanges on the normalised bid-ask spreads when the daily market
capitalisation is included as an additional control.
Table E.5. Impact of integration on the normalised bid ask spread of large caps in Paris,
Brussels, Amsterdam and Lisbon controlling for market capitalisation, by exchanges,
3 Jan 2000 – 31 Dec 2010
Paris -1.046*** -1.041*** -0.700*** -0.702*** -0.702*** -0.697***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Brussels -0.639*** -0.636*** -0.294*** -0.301*** -0.299*** -0.285***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Amsterdam -0.630*** -0.616*** -0.367*** -0.303*** -0.302*** -0.288***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Lisbon 0.038 0.057 0.280*** 0.370*** 0.392*** 0.383***
[0.586] [0.427] [0.000] [0.000] [0.000] [0.000]
DAX volatility (log of) 0.062** 0.161*** 0.208*** 0.239*** 0.234***
[0.014] [0.000] [0.000] [0.000] [0.000]
Traded volume on the -0.636*** -0.072** -0.038 -0.026
Tick change dummy -0.494*** 0.147** 0.171***
[0.000] [0.021] [0.004]
[0.563]
MTF volume (log of) -0.041*** -0.041***
[0.000] [0.000]
Market capitalisation (log of) -0.675*** -0.663*** -0.613*** -0.594*** -0.617*** -0.614***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Constant 1.020*** 1.061*** 15.185*** 2.331*** 1.764*** 6.332
[0.000] [0.000] [0.000] [0.000] [0.003] [0.439]
Observations 347,837 345,605 329,145 329,145 329,145 329,145
R-squared 0.614 0.616 0.638 0.65 0.653 0.653

integration by phases on the normalised bid-ask spreads when the daily closing price of
each security is included as an additional control.
Brussels, Amsterdam and Lisbon, controlling for daily closing price of the security,
by phases, 3 Jan 2000 – 31 Dec 2010
Phase 1 -0.265*** -0.247*** -0.076 -0.176*** -0.186*** -0.186***
[0.000] [0.000] [0.229] [0.004] [0.002] [0.001]
Phase 2 -0.442*** -0.436*** -0.412*** -0.398*** -0.415*** -0.416***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Phase 3 -0.426*** -0.464*** -0.269*** -0.129*** -0.089** -0.090**
[0.000] [0.000] [0.000] [0.001] [0.011] [0.036]
DAX volatility (log of) -0.074*** 0.032 0.115*** 0.157*** 0.157***
[0.010] [0.226] [0.000] [0.000] [0.000]
Traded volume on the -0.534*** -0.061** -0.036 -0.038
Tick change dummy -0.468*** 0.165** 0.162**
[0.000] [0.012] [0.018]
Per capita GDP (log of) 0.056
[0.955]
MTF volume (log of) -0.041*** -0.041***
[0.000] [0.000]
Closing price of the security -0.558*** -0.572*** -0.574*** -0.573*** -0.601*** -0.601***
(log of) [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Constant -2.752*** -2.862*** 9.425*** -1.157** -1.614*** -2.16
[0.000] [0.000] [0.000] [0.039] [0.005] [0.828]
Observations 360,460 356,315 331,215 331,215 331,215 331,215
R-squared 0.607 0.611 0.635 0.645 0.647 0.647

This table presents the results of the econometric analysis of the impact of the integration
by exchanges on the normalised bid-ask spreads when the daily closing price of each
security is included as an additional control.
Table E.7. Impact of integration on the normalised bid ask spread of large caps in Paris,
Brussels, Amsterdam and Lisbon controlling for daily closing price of the security,
by exchanges, 3 Jan 2000 – 31 Dec 2010
Paris -1.198*** -1.178*** -0.728*** -0.735*** -0.739*** -0.730***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Brussels -0.828*** -0.814*** -0.352*** -0.363*** -0.365*** -0.337***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Amsterdam -0.775*** -0.749*** -0.429*** -0.367*** -0.373*** -0.345***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Lisbon -0.068 -0.042 0.245*** 0.349*** 0.373*** 0.356***
[0.279] [0.523] [0.000] [0.000] [0.000] [0.000]
[0.002] [0.000] [0.000] [0.000] [0.000]
Traded volume on the -0.768*** -0.114*** -0.075*** -0.050**
Tick change dummy -0.566*** 0.166** 0.215***
[0.000] [0.011] [0.001]
[0.273]
MTF volume (log of) -0.047*** -0.048***
[0.000] [0.000]
Closing price of the security -0.595*** -0.582*** -0.568*** -0.569*** -0.602*** -0.597***
(log of) [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Constant -2.753*** -2.638*** 14.880*** 0.188 -0.575 8.261
[0.000] [0.000] [0.000] [0.745] [0.335] [0.327]
Observations 360,460 356,315 331,215 331,215 331,215 331,215
R-squared 0.590 0.593 0.628 0.644 0.647 0.648

integration by phases on the normalised bid-ask spreads when the market capitalisation
and the daily closing price of each security are included as additional controls.
Brussels, Amsterdam and Lisbon, controlling for market capitalisation and closing price of
the security, by phases, 3 Jan 2000 – 31 Dec 2010
Ln (bid-ask spread) 1 2 3 4 5 6 7 8
Phase 1 -0.241** -0.259** -0.193*** -0.191*** -0.186*** -0.186*** -0.185*** -0.183***
[0.029] [0.016] [0.001] [0.001] [0.002] [0.001] [0.001] [0.001]
Phase 2 -0.175* -0.125 -0.384*** -0.389*** -0.415*** -0.416*** -0.403*** -0.410***
[0.062] [0.115] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Phase 3 -0.164*** -0.117** -0.042 -0.045 -0.089** -0.090** -0.051 -0.057
[0.000] [0.016] [0.290] [0.308] [0.011] [0.036] [0.175] [0.201]
DAX volatility 0.317*** 0.307*** 0.152*** 0.153*** 0.157*** 0.157*** 0.143*** 0.144***
(log of) [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Traded volume on the
Frankfurt -0.173*** -0.110*** -0.005 -0.011 -0.036 -0.038 -0.009 -0.017
Exchange (log of) [0.000] [0.002] [0.847] [0.690] [0.165] [0.149] [0.723] [0.522]
Tick change -0.332*** -0.180* 0.143** 0.131** 0.165** 0.162** 0.184*** 0.166***
Dummy [0.000] [0.053] [0.026] [0.035] [0.012] [0.018] [0.004] [0.006]
MTF volume -0.008 -0.014** -0.036*** -0.035*** -0.041*** -0.041*** -0.040*** -0.039***
(log of) [0.106] [0.018] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Per capita GDP -2.669** 0.234 0.056 0.337
(log of) [0.047] [0.805] [0.955] [0.709]
Market capitalisation -0.612*** -0.614*** -0.436*** -0.438***
(log of) [0.000] [0.000] [0.000] [0.000]
Last price of the -0.601*** -0.601*** -0.200* -0.200*
security (log of) [0.000] [0.000] [0.064] [0.064]
Constant 0.001 25.781* 0.868 -1.39 -1.614*** -2.16 0.05 -3.2
[0.999] [0.054] [0.119] [0.881] [0.005] [0.828] [0.947] [0.724]
Month fixed effects Yes Yes Yes Yes Yes Yes Yes Yes
Security fixed effects Yes Yes Yes Yes Yes Yes Yes Yes
Observations 332,831 332,831 329,145 329,145 331,215 331,215 327,529 327,529
R-squared 0.606 0.607 0.652 0.652 0.647 0.647 0.651 0.651

This table presents the results of the econometric analysis of the impact of the integration
by exchanges on the normalised bid-ask spreads when the market capitalisation and the
daily closing price of each security are included as additional controls.
Brussels, Amsterdam and Lisbon, controlling for market capitalisation and closing price of
the security, by exchanges, 3 Jan 2000 – 31 Dec 2010
Ln (bid-ask spread) 1 2 3 4 5 6 7 8
Paris -0.592*** -0.561*** -0.702*** -0.697*** -0.739*** -0.730*** -0.713*** -0.708***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Brussels -0.256** -0.143 -0.299*** -0.285*** -0.365*** -0.337*** -0.316*** -0.302***
[0.012] [0.182] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Amsterdam -0.081 0.023 -0.302*** -0.288*** -0.373*** -0.345*** -0.331*** -0.318***
[0.563] [0.851] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Lisbon 0.356*** 0.287*** 0.392*** 0.383*** 0.373*** 0.356*** 0.385*** 0.376***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
DAX volatility 0.440*** 0.389*** 0.239*** 0.234*** 0.262*** 0.251*** 0.233*** 0.228***
(log of) [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Traded volume on the
Frankfurt -0.253*** -0.146*** -0.038 -0.026 -0.075*** -0.050** -0.04 -0.029
exchange (log of) [0.000] [0.000] [0.206] [0.267] [0.007] [0.032] [0.159] [0.196]
Tick change dummy -0.324*** -0.11 0.147** 0.171*** 0.166** 0.215*** 0.184*** 0.207***
[0.000] [0.178] [0.021] [0.004] [0.011] [0.001] [0.004] [0.000]
MTF volume -0.015*** -0.021*** -0.041*** -0.041*** -0.047*** -0.048*** -0.045*** -0.045***
(log of) [0.005] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Per capita GDP -3.800*** -0.48 -0.925 -0.443
(log of) [0.001] [0.563] [0.273] [0.569]
Market capitalisation -0.617*** -0.614*** -0.467*** -0.464***
[0.000] [0.000] [0.000] [0.000]
Last price of the -0.602*** -0.597*** -0.170* -0.171*
security (log of) [0.000] [0.000] [0.084] [0.083]
Constant 1.909** 38.133*** 1.764*** 6.332 -0.575 8.261 1.053 5.271
[0.016] [0.001] [0.003] [0.439] [0.335] [0.327] [0.164] [0.500]
Month fixed effects Yes Yes Yes Yes Yes Yes Yes Yes
Security fixed effects Yes Yes Yes Yes Yes Yes Yes Yes
Observations 332,831 332,831 329,145 329,145 331,215 331,215 327,529 327,529
R-squared 0.607 0.609 0.653 0.653 0.647 0.648 0.651 0.651

Annex F. Impact of the NYSE-Euronext merger
Table F.1. Impact of the NYSE-Euronext merger on the normalised bid-ask spreads of large
caps in Paris, Brussels, Amsterdam and Lisbon, 2 January 2004 – 31 December 2010
Ln (bid-ask spread) 1 2 3 4 5 6 7
NYSE merger -0.351*** -0.471*** -0.328*** -0.039 -0.011 -0.004 0.012
[0.000] [0.000] [0.000] [0.327] [0.779] [0.924] [0.777]
DAX volatility 0.247*** 0.291*** 0.272*** 0.276*** 0.272*** 0.290***
(log of) [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Traded volume on the Frankfurt -0.414*** -0.243*** -0.244*** -0.215*** -0.243***

exchange (log of) [0.000] [0.000] [0.000] [0.002] [0.001]
Tick change -0.374*** -0.347*** -0.320***

Dummy [0.000] [0.000] [0.000]
Per capita GDP -0.582 -1.549

[0.640] [0.152]
MTF volume -0.003 -0.005 -0.023***
(log of) [0.602] [0.521] [0.000]
Constant -5.122*** -4.483*** 5.065*** 1.183 1.22 6.514 17.068*

[0.000] [0.000] [0.000] [0.267] [0.244] [0.574] [0.085]
Month fixed effects Yes Yes Yes Yes Yes Yes Yes
Security fixed effects Yes Yes Yes Yes Yes Yes Yes
Observations 243,373 242,051 242,051 242,051 242,051 242,051 242,051
R-squared 0.625 0.633 0.635 0.637 0.637 0.637 0.636
within securities. Estimation residuals are stationary according with the Fisher stationary test for panel
regressions. See Maddala, G.S. and S. Wu (1999) “A comparative study of unit root tests with panel data and
a simplified test”, Oxford Bulleting of Economics and Statistics, pp. 631-652. (b) * significant at 10%; **
significant at 5%; *** significant at 1%. (c)The sample is composed by 158 large caps. It includes securities
that have composed the main index of the Paris, Brussels, Amsterdam and Lisbon exchanges (the CAC 40,
BEL20, AEX and the PSI) at any point throughout the sample period. (d) Bid-ask spreads calculated using
price data provided by Bloomberg.

Annex G. Possible omitted variables
Figure G.1. Average residuals by stock exchange
Amsterdam, AEX Belgium, BEL

1 1
.5 .5
0 0
-.5 -.5
-1 -1
01dec2000
01dec2001
01dec2002
01dec2003
30nov2004
30nov2005
30nov2006
30nov2007
29nov2008
29nov2009
29nov2010
01dec2000
01dec2001
01dec2002
01dec2003
30nov2004
30nov2005
30nov2006
30nov2007
29nov2008
29nov2009
29nov2010
Paris, CAC Portugal, PSI
1.5
1.5
1
1
.5
.5
-.5
-.5
-1
01dec2000
01dec2001
01dec2002
01dec2003
30nov2004
30nov2005
30nov2006
30nov2007
29nov2008
29nov2009
29nov2010
01dec2000
01dec2001
01dec2002
01dec2003
30nov2004
30nov2005
30nov2006
30nov2007
29nov2008
29nov2009
29nov2010
Note: (i) the horizontal line represents the average residual before the integration of Paris; (ii) dotted vertical
lines shows dates of integration: Paris and Brussels on 1 March 2002; Amsterdam on 25 October 2002; and
Lisbon on 1 November 2003.

Table G.1. Regression results using a specification without integration variables and adding
quarter-year index fixed effects, Paris (CAC) securities only,
1 December 2000 – 31 December 2010
Ln (bid-ask spread) [1] [2] [3] [4]

DAX volatility 0.030** -0.001 -0.003 -0.004
(log of) [0.010] [0.923] [0.806] [0.716]
Traded volume on the -0.036 -0.026 -0.022 -0.024
Tick change -0.538*** -0.577*** -0.628*** -0.602***
Dummy [0.000] [0.000] [0.000] [0.000]
Per capita GDP -10.980*** -8.708** -8.807** -8.594**
(log of) [0.003] [0.020] [0.019] [0.022]
MTF volume -0.013*** -0.013*** -0.014*** -0.013***
(log of) [0.000] [0.000] [0.000] [0.000]
Market capitalisation -0.453*** -0.274***
(log of) [0.000] [0.000]
Last price of the -0.464*** -0.216***
security (log of) [0.000] [0.001]
Constant 105.009*** 86.076** 84.377** 83.964**
[0.005] [0.023] [0.026] [0.027]
Quarter-year fixed effects Yes Yes Yes Yes
Month fixed effects No No No No
Security fixed effects Yes Yes Yes Yes
Observations 106,153 106,061 106,152 106,060
R-squared 0.39 0.412 0.411 0.413
within securities; (b) * significant at 10%; ** significant at 5%; *** significant at 1%; (c) the sample contains
securities that have composed the main index of the Paris exchange (the CAC 40) at any point throughout the
sample period; (d) all regressions include a set of single-day event dummies; (e) bid-ask spreads calculated
using price data provided by Bloomberg.

quarter-year index fixed effects, Belgium (BEL) securities only,

DAX volatility 0.133*** 0.106*** 0.109*** 0.109***
(log of) [0.000] [0.000] [0.000] [0.000]
Traded volume on the 0.083** 0.093** 0.081* 0.083**
Tick change -0.457*** -0.559*** -0.601*** -0.601***
Dummy [0.006] [0.000] [0.000] [0.000]
Per capita GDP -11.477** -9.262** -9.395** -9.425**
(log of) [0.018] [0.026] [0.023] [0.024]
MTF volume -0.012** -0.012** -0.013** -0.013**
(log of) [0.029] [0.028] [0.023] [0.023]
Market capitalisation -0.406*** 0.009
(log of) [0.000] [0.897]
Last price of the -0.420*** -0.425***
security (log of) [0.000] [0.000]
Constant 109.343** 89.804** 89.699** 89.912**
[0.025] [0.033] [0.031] [0.032]
Observations 64,160 63,985 64,140 63,965
R-squared 0.421 0.437 0.448 0.448
securities that have composed the main index of the Brussels exchange (the BEL 20) at any point throughout
the sample period; (d) all regressions include a set of single-day event dummies; (e) bid-ask spreads
calculated using price data provided by Bloomberg.

quarter-year index fixed effects, Amsterdam (AEX) securities only,

DAX volatility 0.148*** 0.081*** 0.076*** 0.079***
(log of) [0.000] [0.000] [0.000] [0.000]
Traded volume on the 0.058** 0.050* 0.033 0.04
Tick change -0.371* -0.633*** -0.704*** -0.652***
Dummy [0.084] [0.000] [0.000] [0.000]
Per capita GDP 0 0 0 0
(log of) [.] [.] [.] [.]
MTF volume 0.003 0.002 0.001 0.002
(log of) [0.424] [0.540] [0.700] [0.606]
Market capitalisation -0.747*** -0.576***
(log of) [0.000] [0.000]
Last price of the -0.814*** -0.202
security (log of) [0.000] [0.207]
Constant -7.522*** -1.125 -4.934*** -1.807*
[0.000] [0.141] [0.000] [0.057]
Observations 89,720 86,388 89,394 86,062
R-squared 0.618 0.737 0.732 0.737
securities that have composed the main index of the Amsterdam exchange (the AEX 25) at any point

quarter-year index fixed effects, Portugal (PSI) securities only,

DAX volatility 0.112*** 0.091*** 0.090*** 0.089***
(log of) [0.000] [0.000] [0.000] [0.000]
Traded volume on the 0.047 0.054* 0.042 0.041
Tick change -0.141 -0.298 -0.403** -0.408**
dummy [0.334] [0.119] [0.027] [0.029]
Per capita GDP 0 0 0 0
(log of) [.] [.] [.] [.]
MTF volume 0.013*** 0.013*** 0.014*** 0.014***
(log of) [0.002] [0.002] [0.001] [0.001]
Market capitalisation -0.366** -0.128
(log of) [0.021] [0.583]
Last price of the -0.358*** -0.264
security (log of) [0.001] [0.142]
Constant -6.244*** -3.926*** -5.727*** -4.957***
[0.000] [0.002] [0.000] [0.002]
Observations 72,798 72,711 71,529 71,442
R-squared 0.489 0.501 0.494 0.495
securities that have composed the main index of the Lisbon exchange (the PSI 20) at any point throughout the
sample period; (d) all regressions include a set of single-day event dummies; (e) bid-ask spreads calculated
using price data provided by Bloomberg.

Figure G.2. Estimated quarter-year-index fixed effects by exchange, 2000Q4-2010Q4
quarter-year fixed effects
.5
-.5
2000q4
2001q2
2001q4
2002q2
2002q4
2003q2
2003q4
2004q2
2004q4
2005q2
2005q4
2006q2
2006q4
2007q2
2007q4
2008q2
2008q4
2009q2
2009q4
2010q2
2010q4
AEX CAC BEL PSI
Note: (i) Estimated time fixed effects are fitted under specification 4 in the tables in Annex G; (ii) The sample
used begins on 1 December 2000 as volumes traded on the Frankfurt exchange are available from that date
on.
Notes
1 See, e.g. Rochet, J.C., and J. Tirole (2006) “Two-sided markets: a progress report,” RAND
Journal of Economics, 37(3): 645-667
2 Professors Hermalin and Katz note that in these markets the sum of the socially optimal prices for
the platform services will be above or below marginal cost, either because a reduction in the
number of users on one side has an infra-marginal impact on the surplus derived from the users of
the other side, or because the reduction in the number of users on one side may affect the
probability that a user on the other side finds a suitable partner with whom to transact. See
Hermalin, B.E, and M. L. Katz (2017) “What’s so special about two-sided markets?,” forthcoming
in Economic theory and public policies: Joseph Stiglitz and the teaching of economics, Columbia
University Press.
3 See, e.g., Wright, J., (2004) “One-sided logic in two-sided markets,” Review of Network
Economics, 3(1): 44-64, and Evans, D.S., and R. Schmalensee (2007) “The industrial organization
of markets with two-sided platforms,” Competition Policy International, 3(1): 151.
4 Evans, D.S. (2003) “The anti-trust economics of multi-sided platform markets,” Yale Journal on
Regulation, 20(2): 325-382.
5 That is, if users on one side of one the merging platforms can transact with users on the other side
of the other merging platforms.
6 See Chandra, A., and A. Collard-Wexler (2009) “Mergers in two-sided markets: an application to
the Canadian newspaper industry,” Journal of Economics and Management Strategy, 18(1), 1045-
1070; Fillistrucchi, L., Klein, T., and T. Michielsen (2012) “Assessing unilateral merger effects in
a two-sided market: an application to the dutch daily newspaper market”, Journal of Competition
Law and Economics, 8(2): 297-329; and and Baranes, E., Cortade, T. and A. Cosnita-Langlais

(2016), “Merger control on two-sided markets: is there need for an efficiency defense?,” NET
Institute, available at www.NETinst.org.
7 See Chandra, A., and A. Collard-Wexler (2009), op. cit. note 6.
8 See Jeziorski P. (2014) “Effects of mergers in two-sided markets: the U.S. radio industry,”
American Economic Journal: Microeconomics, 6(4): 35-73.
9 See Cantillon, E., and P.L. Yin (2011), “Competition between exchanges: a research agenda,”
International Journal of Industrial Organization,” 29 (3): 329-336.
10 See Pagano, M., and J. Padilla (2005a), “The economics of cash trading: an overview”, report
prepared for Euronext, and references therein.
11 See Arnold, T., P. Hersch, J.H. Mulherin, and J. Netter (1999) “Merging Markets”, Journal of
Finance, 54(3): 1083-1107.
12 Pagano, M., and J. Padilla (2005b), “Efficiency gains from the integration of exchanges: lessons
from the Euronext “natural experiment,” report prepared for Euronext.
13 Nielsson, Ulf (2009) “Stock exchange merger and liquidity: the case of Euronext,” Journal of
Financial Markets, 12(2): 229-267.
14 Data includes all securities that have composed each index at any time throughout the sample
period.
15 Annex A provides descriptive statistics on the bid-ask spreads provided by Bloomberg. Note that
these are normalised bid-ask spreads.
16 These techniques make it possible to estimate the relationship between two variables when the
variable under investigation is potentially influenced by many other factors.
17 A list of these events is reported in Annex B.
18 See Annex C for further description of the variables and data used in this paper.
19 See Euronext (2007), “Further information following the info-flash of 5 January 2007 regarding
new trading hours and tick size on the Euronext Cash Market.
20 We include the daily volume of securities listed in the CAC 40, BEL 20, AEX and PSI indices
traded on Chi-X and Bats.
21 See also Nielsson (2009, page 12) for further discussion of this issue.
22 The main econometric results in this paper are included in Tables 3 to 5 and can be found in
Annex D.
23 Results are unchanged if we replace this volatility measure for the volatility of the FTSE index.
See Annex E.
24 Multicollinearity occurs when some of the control variables are linearly related. When this linear
relationship is strong, the variation in the explanatory variables is insufficient to accurately
calculate the effect of these explanatory variables on the dependent variable. See Kennedy P.
(2003), A Guide to Econometrics 5th edition, Cambridge: MIT Press, Chapter 11.
25 This could be consistent with Pagano (1989) and Chowdry and Nanda (1991) who argue that
liquidity will tend to concentrate in a few markets if transaction costs are limited. See Pagano, M.
(1989), “Trading volume and asset liquidity”, Quarterly Journal of Economics, 104(2), 255-274
and Chowdry, B. and V. Nanda (1991), “Multimarket trading and market liquidity”, Review of
Financial Studies, 4(3), 483-511.

26 The tables discussed in this Section can be found in Annex E.

27 Note however that the results reported in Columns (1) to (4) are qualitatively similar.
28 See Annex C for precise definitions of these measures.
29 Pagano, M. (1989a) “Endogenous market thinness and stock price volatility”, Review of Economic
Studies, 56: 268-288.
30 Results including this additional control can be found in Column (3) in Table 7. Because of the
addition of this additional variable we have seven columns in Table 7.
31 Pagano, M. (1989b) “Trading volume and asset liquidity”, Quarterly Journal of Economics, 104:
255-274.
32 The models were estimated including as control variables the price of the securities and market
capitalisation variables separately and including both variables jointly. Note that floating market
capitalisation data from Bloomberg is only available as of January 2005, and therefore, it is not
possible to include this variable as an additional control variable. Our results remain qualitatively
unaltered irrespective of whether the price of the securities and market capitalisation variables are
included separately or jointly.
33 See Annex F.
34 ee next Section for further discussion on this issue.
35 See Tables 16 to 19 in Annex G.
36 Aggarwal, R., (2002), “Demutualization and corporate governance of stock exchanges”, Journal
of Applied Corporate Finance, 15(1): 105-113.

8. NETWORK EFFECTS AND EFFICIENCIES IN MULTISIDED MARKETS │ 189
8. Network effects and efficiencies in multi-sided markets
By Howard Shelanski, Samantha Knox and Arif Dhilla 1
This paper examines the relationships among parties in a multi-sided market and
discusses how those relationships should affect the analysis of competitive effects and
efficiencies when competition agencies review conduct or transactions by multi-sided
platforms.
1. Relationships and network effects across multi-sided platforms
Defining multi-sided markets and network effects

A rapidly growing literature has produced several definitions of a multi-sided market or
platform (this paper will use these terms interchangeably). Some of these definitions
focus on pricing structure, others highlight the platform’s role in connecting multiple
groups, and still others stress the existence of network effects.1 That said, there is a
general consensus that multi-sided markets share two defining features: distinct groups
that interact with each other across the platform, and cross-platform externalities or
network effects among those distinct groups 2
Distinct groups. Multi-sided markets have at least two distinct groups or sides that rely
on the platform to connect them directly or indirectly to each other. 3 For example,
YouTube is a three-sided on-line video market connecting three distinct groups: (i) users
(i.e. subscribers or end-user consumers), (ii) content/service providers, and (iii)
advertisers. While the three sides are distinct, members of one side may participate in
multiple facets of the market simultaneously. Users that share content are also content
providers to other users, and content providers might also be advertisers if they pay the
platform or other content providers to carry their ads to users with whom they are not yet
connecting.
Cross-platform network effects. The different sides of a platform market are
interdependent to the extent their decisions affect each other, even indirectly. 4 Network
effects are the cross-platform externalities that result when the actions of participants on
any side of the platform, or of the platform itself, affect participants on other sides of the
platform (or the functioning of the platform itself). The externality can be direct, as when
an increase in content providers makes the platform more valuable to content consumers,
or indirect, as when a platform’s provision of better terms for users makes the platform
more attractive to content or service providers and to advertisers. For ease of exposition,
this paper will refer to all cross-platform externalities simply as “network effects.”
1
Howard Shelanski is a Partner at Davis Polk & Wardwell LLP and a Professor of Law at
Georgetown University. Samantha Knox and Arif Dhilla are associates at Davis Polk & Wardwell,
LLP. We thank Ilana Rice for assistance with this draft paper.

190 │ 8. NETWORK EFFECTS AND EFFICIENCIES IN MULTISIDED MARKETS
A positive network effect occurs when “the value that a customer on one side realizes
from the platform increases with the number of customers on the other side.” 5 For
example, eBay—through which individuals can buy and sell goods on line—becomes
more valuable to buyers as the number of sellers increases because there are more items
available for sale. At the same time, eBay becomes more valuable to sellers as the number
of buyers increases because there are more potential customers available. Network effects
need not be symmetric or even run in the same direction between two sides of a market.
Advertisers probably benefit from an increase in users more than users benefit from an
increase in advertisers, and in some cases users may even suffer detriment from increased
advertising. 6
Because network effects create interdependencies among the groups on a multi-sided
platform, a feedback loop may develop when membership of one side of the platform
grows or shrinks. To illustrate, assume a platform raises the price of platform access for
suppliers of some good or service. If some of those suppliers leave, the platform becomes
less valuable to customers on the other side of the market, who in turn also leave, further
reducing the platform’s value to the remaining suppliers, and so forth. 7 These dynamics
need not be perpetual or irreversible, but at some point they can go far enough to tip a
platform market toward failure or dominance. As discussed below, the effects of this
feedback loop may have important implications for both conduct and merger analyses.
Relationships on multi-sided platforms: Service-based and subsidy-based

As defined above, a multi-sided market consists of at least two distinct groups that rely on
a platform to interact. The relationship between the two groups can be categorised as
either service-based or subsidy-based.
In a service-based relationship, the supply side (the “suppliers”) provides a service or
good to the demand side (the “users”). Service-based relationships are common in
platforms such as:
• Airbnb – connecting people searching for a place to stay with homeowners
renting their properties;
• Amazon.com – connecting shoppers with merchants selling their goods;
• Uber – connecting riders with drivers offering rides;
• OpenTable – connecting diners with restaurants;
• Shopping Malls – connecting shoppers with stores selling their goods; and
• Apple App Store – connecting Apple product users with application developers
offering applications.
In contrast, a subsidy-based relationship exists when one side indirectly defrays another
side’s costs of using the platform but does not offer an additional service that directly
attracts users to that platform. 8 Facebook, Twitter, YouTube, Snapchat, Pandora, the New
York Times, and television and radio stations are examples of multi-sided markets
involving subsidy-based relationships. Each of these entities connects users (or readers,
viewers, and listeners) with advertisers, and each gives users below-cost (and often free)
access to the platform and its services because of payments from advertisers.
Where a subsidy-based relationship exists, the larger multi-sided market will have at least
three sides: subsidisers (e.g., advertisers), suppliers (e.g., content/service providers), and
users (e.g. subscribers). Subsidisers do not typically attract users to a platform on their
own because they do not usually offer a good or service that users specifically seek out. A
distinct service-based relationship is therefore required to bring users into the market. 9

Supply of such content or services might come from third parties (e.g., journalists and
musicians), the platform itself (e.g., Amazon and Netflix), or other platform users (e.g.,
Facebook, Twitter, Snapchat).
Relative strength of network effects

The nature of a relationship across a multi-sided platform is significant because it affects
the direction (i.e. positive or negative) and strength of network externalities among the
sides of the market. As discussed above, all sides of a multi-sided market will usually
experience some externality from the actions of other sides. The strength and direction of
those network effects will, however, vary across the sides of the platform depending in
part on whether the relationship is service-based or subsidy-based. 10
Service-based relationships typically result in positively correlated and relatively
balanced network effects. Consider Airbnb, which connects people searching for a place
to stay with property owners offering short-term rentals, perhaps to defray their own
living costs. The two parties are in a service-based relationship. Because renters are
seeking properties, renters benefit when new property owners join and expand the rental
inventory. Similarly, property owners benefit when new renters join and expand the pool
of potential customers. The interdependent nature of the two sides’ relationship causes
feedback effects whereby more renters drive more owners to join and more owners drive
more renters to join. The network effects between renters and owners are therefore
positively correlated and relatively symmetric. This observation extends generally to
service-based relationships because, as with renters and property owners, one side wants
the services/goods of the other and the other side wants a larger customer base.
Network effects in subsidy-based relationships are skewed towards the subsidiser and
could correlate negatively. Subsidisers—e.g., advertisers on Twitter—benefit as the
number of platform users grows and more people view the advertisements. As the pool of
potential customers expands, the platform becomes more beneficial for advertisers, and
more advertisers continue to join. Users, by contrast, experience weaker network
externalities in subsidy-based relationships. Users benefit when enough advertisers join
that they can subsidise the platform’s operations and investments for the benefit of users
and providers. Once that subsidy has been paid, however, users might not experience
additional benefits (and could experience detriment) from additional advertising, unless
that advertising somehow increases the supply of services or content that has attracted the
user to the platform in the first place. 11 Therefore, even though both the supplier and the
subsidiser benefit as the user base increases, it is the supplier that is more likely to drive
user demand for access to the platform. Subsidisers are thus highly dependent on each
additional supplier while suppliers may be indifferent to additional subsidisers (assuming
enough advertisers are present to subsidise the platform for the users) except to the extent
that incremental advertising might lead to better terms of platform usage or higher
revenues for the suppliers. The network effect of an increase in suppliers is therefore
likely to be stronger for subsidisers than the network effect of an increase in subsidisers
would be for the suppliers.
Platform actions that initially appear to have opposing effects on different sides of the
market may have important secondary effects. The following hypothetical examples
using the Uber platform 12 illustrate this fact:
1. Assume Uber increases fares. That act appears directly to harms rider and benefit
drivers. If the fare hike causes riders to leave the platform (or reduce the number
of rides they take), however, the fare increase could also harm drivers in the end.

2. Assume Uber maintains fares but increases the percentage of the fare it keeps for
the company. That conduct appears directly to harm drivers and leave riders
unaffected. If this action causes drivers to leave the platform (or reduce the
number of rides they offer), however, it will also harm riders.
3. Assume Uber prohibits drivers from also driving for competing ride hailing
services. That policy might harm drivers while appearing to leave riders
unaffected. But if drivers leave the platform in response, the action will also harm
riders.
4. Assume Uber prohibits riders from riding with competing services. The action
directly harms riders but not drivers, unless riders abandon Uber in response.
While it is difficult to predict the extent of the benefit or harm caused, regulators should
be aware that conduct harming one side of a service-based relationship has the potential
to result in harm to the other side (and vice versa). Depending on conditions and indirect
effects, conduct that at first look appears to affect parties differently may have effects that
are positively correlated across different sides of the market, thereby exacerbating either
the harms or the benefits.
Identifying the relationships across a platform as either service-based or subsidy-based
can therefore be important to predicting the relative balance of network effects among the
different sides of the market. As discussed below, the balance and direction of network
effects can have important implications for how regulators should evaluate net welfare
effects of conduct and transactions by multi-sided platforms.
2. Accounting for efficiencies on all sides of the platform
Careful consideration of the economic efficiencies of a course of conduct or transaction

will give courts and agencies a more complete view of the impact of the conduct or
transaction on competition, output, and consumer welfare. Today, U.S. courts and
agencies regularly weigh the claimed efficiencies of a course of conduct or a transaction
against its competitive effects. In the merger context, U.S. agencies consider efficiencies
primarily as part of the defendant’s justifications for a transaction, especially where such
benefits of the transaction are presented to offset potential unilateral effects of the
merger. 13 In unilateral conduct analyses, efficiencies are most often part of the “business
justification” defense. 14 In both contexts, the defendant bears the burden of proving that
the efficiencies exist. 15
In the eyes of courts and agencies, not all efficiencies are created equal; in fact, the class
of efficiencies that are credited, or “cognizable,” is rather narrow. 16 In both the unilateral
conduct and merger contexts, courts and agencies give more weight to efficiencies that
reduce costs or boost output, particularly where those efficiencies result in reduced prices,
improved quality, or new products. 17 This narrow definition may need to be expanded,
however, for multi-sided platforms, which might not themselves produce a good or
service apart from their critical role of providing various groups with a means to interact.
Importantly, platforms minimise transaction costs by replacing countless one-to-one
interactions with a single one-to-many interaction: a single buyer finds many sellers in
one place, and vice versa, thereby allowing the groups to find each other more efficiently
than they could absent the platform. Efficiencies that can even further reduce transaction
costs among sides of the platform should count in favor of the conduct or transaction at
issue. Accounting for those efficiencies requires consideration of relevant cross-network
externalities.

Role of efficiencies in conduct analyses involving multi-sided markets

Both the nature of the relationships and the relative strength of the network effects among
parties in a multi-sided market have important implications for evaluating the efficiencies
and effects of a challenged course of conduct, as we discuss below.
The extent to which regulators should consider each side of a multi-sided market when
analysing efficiencies depends on what types of cross-platform relationships are at
issue. Courts in multiple jurisdictions have recognised that both sides of a two-sided
market must be considered in (1) defining the relevant markets; (2) determining market
power; and (3) assessing the existence of adverse effects on competition. 18 Agencies
should similarly consider the extent to which the efficiencies from the conduct at issue
accrue on all sides of a platform. The effects (positive or negative) of conduct will usually
differ across a platform and therefore may not warrant equal scrutiny on every side of the
market.
In a multi-sided market with a service-based relationship between two sides, the network
effects are such that a platform’s actions directed at one side will likely have a
meaningful impact on the other side. As a result, regulators should consider the potential
effects on the non-targeted side of a service-based relationship. This analysis should
extend not just to the competitive effects of the conduct, but also to any demonstrable
efficiencies. For example, an exclusive or preferential arrangement between a platform
and a service provider might give the service provider better access to the platform’s
users but have the offsetting effect of reducing consumer choice. If, however, there are
efficiencies in the form of reduced transaction costs between the platform and the service
provider or increased specific investment by the service provider in the platform to
improve its service offerings, benefits from those efficiencies to consumers on the other
side of the market should be taken into account as well.
When a subsidiser is also part of the platform dynamics, the analysis has an additional
dimension. Actions that reduce the engagement of either users or service providers with
the platform could drive away subsidisers that are potentially sensitive to the number of
users and the amount of time users spend on the platform. 19 The opposite is not
necessarily true, however, given the asymmetry in the feedback effects inherent in a
subsidy relationship. The platform’s conduct toward subsidisers might have little impact
on the other sides of the market, so long as sufficient subsidies remain in place.
Accordingly, if the conduct is directed only at a subsidiser, agencies and courts can apply
a more traditional one-sided analysis of both effects and efficiencies (so long as the
conduct would not drive all subsidisers off of the platform). Put differently, where
consumers and service providers on a platform do not value what the subsidiser does
(e.g., advertising, data brokering), actions that harm the subsidiser are unlikely to harm
other sides of the market so long as enough subsidies remain in place. Because the
platform has incentives to maintain or increase the subsidies for the “free” services that
keep end users on the platform, enforcers can more strongly presume that the platform’s
conduct toward subsidisers is beneficial for other sides of the platform.
Where efficiencies associated with conduct toward one side benefit other sides as well,
they should be counted on all sides where sufficiently proven. For example, assume eBay
only allows payments to be made through PayPal, an online payment system. eBay could
justify its action as being efficient for: (1) eBay by reducing back-end costs associated
with permitting various payment types, (2) buyers by streamlining the purchasing
process, and (3) sellers by avoiding credit card transaction fees. If verifiable, regulators

should consider each of the efficiencies in determining whether the action was
anticompetitive.
Workflow for conduct analyses by competition agencies. When analysing the effect of
challenged conduct on a multi-sided market, regulators should first look at the
relationship between the targeted side of the platform and the other sides of the
platform. 20 When conduct targets a side of the market participating in a service-based
relationship, regulators should closely evaluate the potential impacts on all sides of the
market given the likely cross-platform network effects, regardless of which side the
conduct targets. If, in contrast, a platform directs its conduct toward subsidisers, cross-
platform effects are much less likely unless the action would drop subsidies to insufficient
levels, which would render the conduct economically senseless and therefore unlikely to
continue or to occur in the first place.
With respect to efficiencies, therefore, agencies need to take into account how
efficiencies that flow directly to users or suppliers will also indirectly affect other sides of
the market through cross-network effects. When the efficiencies directly benefit
subsidisers, there is less likelihood of such cross-network effects benefitting users or
suppliers. The implication is that if conduct is efficient for suppliers or users but might
raise prices for subsidisers, the reviewing agency should consider whether the efficiencies
offset that possible harm to subsidisers through cross-platform externalities. Where, on
the other hand, the conduct’s direct effect is to harm users or suppliers, it is less likely
that efficiency gains for the subsidisers will offset those harms, unless that benefit to the
subsidiser is necessary to attract or maintain necessary subsidy levels. It therefore may be
more important for authorities to consider efficiency effects on all sides of a multi-sided
platform when those efficiencies benefit users or suppliers than when they benefit
subsidisers.
Efficiencies in merger analysis involving multi-sided markets

The nature of the relationships among parties in a multi-sided market and the relative
strength of network effects also have important implications for merger analysis,
particularly with regard to the consideration of efficiencies.
Mergers involving service-based platforms have particular potential to generate
efficiencies. Economic theory suggests that a merger of multi-sided platforms may
generate unique efficiencies that would not result from a merger of two one-sided firms. 21
Because of network effects platforms can potentially generate positive externalities just
by increasing in size. Further empirical research is needed to understand the conditions
under which this positive outcome will result, although the potential for a merger to
amplify positive cross-platform externalities is likely greatest where network effects
generate a robust positive feedback loop. As discussed above, this is more likely to occur
where merging platforms mediate similar kinds of service-based relationships between
users and suppliers.
Network effects can constrain price increases to consumers. At the root of most merger
analysis is an initial presumption that increased concentration will lead to increased prices
for consumers. 22 Several recent studies suggest that when it comes to mergers involving
two multi-sided platforms, that presumption might not hold. For example, in one recent
simulation of a merger to monopoly in the market for German TV magazines, the
structural model predicted that post-merger, magazines would raise rates to advertisers,
but lower per-copy prices to consumers (in order to drive up circulation). 23 Similarly, in
another recent simulation of a hypothetical merger in the Dutch newspaper market, the

model illustrated that an increase in subscription prices was likely to have a negative
effect on both subscriber demand (resulting in lower circulation) and on advertising
revenue (since decreased circulation leads to less demand for advertising). 24 The authors
concluded that “raising the newspaper price is likely to lead not only to a loss in readers
but also to a loss in advertising, and therefore the tendency to increase prices will be
lower than in the absence of network effects.” 25
Subsidisers may be more vulnerable to unilateral effects than service providers or
users. The dependence of the demand for advertising on the number of platform users
leads to a closely related corollary: subsidisers might be more vulnerable to the unilateral
effects of a merger than other platform participants. As illustrated above, strong network
effects can serve as an independent pricing constraint on a platform’s incentive and
ability to raise prices. Because the network effects in a subsidy-based relationship are
skewed heavily towards the subsidiser, however, the relatively weak network effects
experienced by users and content providers might not provide the same constraint on
price increases to advertisers. Indeed, several recent studies suggest that consolidation of
multi-sided platforms results in higher prices to subsidisers. 26 While more research is
needed to test this observation, this apparent effect may be explained by the fact that
platforms can drive user demand by increasing rates to advertisers and decreasing
subscription costs or increasing quantity or quality for users. 27
Platform mergers that result in price increases may yield net efficiencies. Even if it is
true that subsidisers would be subject to price increases following a merger, the merger
could nonetheless yield welfare gains—including for the subsidisers themselves. For
example, Song’s study finds that both the average surplus and the total surplus to
advertisers went up at magazines that increased advertising prices post-merger because
the lower copy prices raised the number of subscribers and in turn the audience for the
advertisers. 28 The study found that although “[a]dvertisers . . . usually face higher ad
prices in more concentrated markets . . . they are not necessarily worse off if lower copy
prices attract a large number of readers.” 29 This result does not imply that subsidisers will
always gain from a merger of multi-sided platforms, but it does imply that the efficiencies
analysis of such a merger should take into account the cross-platform externalities of any
merger-related increase in the number of users to whom advertisers will have access.
Presumably, subsidisers will always benefit from an increase in a platform’s
subscriber/user base. 30 A merger of overlapping multi-sided platforms will necessarily
result in such an increase. It is therefore plausible that any post-merger price increase to
subsidisers could be entirely offset by the increase in the subscriber/user base that results
from the merger. Cross-platform network effects must therefore inform the efficiencies
analysis in mergers of multi-sided markets.
3. Conclusion
This paper has examined how the nature of the relationships among the different sides of
a multi-sided platform can affect the direction, magnitude, and relative balance of cross-
platform network effects. Whether a platform’s actions affect parties engaged in subsidy
relationships or service relationships has important implications for evaluating the
competitive effects and efficiencies. For example, the extent to which efficiencies that
flow directly to one side of the market will have positive externalities that offset
competitive harm to another side of the market will depend in part on whether the direct
beneficiary is a consumer, supplier or subsidiser for the potentially harmed side of the
platform. Efficiency gains to users and suppliers are more likely, through the network

effects generated through service relationships, to generate compensating externalities

than are efficiency gains to subsidisers. Accordingly, the efficiency analysis for conduct
by multi-sided platforms should begin by identifying the nature of the relationship
between the targeted side of the platform and other sides of the platform. In the merger
context, we have discussed how consolidation of two multi-sided platforms can
sometimes lead to stronger constraints on price increases to consumers and generate
benefits simply through scale, even if the merger also increases the ability of the post-
merger platform to exercise market power. In sum, looking at all sides of a platform and
taking account of the kinds of relationships and externalities that flow across the platform
will allow competition authorities to develop a more complete measure not just of
competitive effects, but of the efficiencies of a platform’s business decisions.
Notes
1 See Gönenç Gürkaynak et al., Multisided Markets and the Challenge of Incorporating Multisided
Considerations into Competition Law Analysis, 5 J. ANTITRUST ENFORCEMENT 100, 101–05
(2017) (describing various definitions of multisided markets).
2 The delegates at the 2009 OECD Policy Roundtable on Two-Sided Markets recognised that both
(1) distinct groups and (2) network effects between the groups were essential elements of a two-
sided market. Secretariat, Executive Summary, in POLICY ROUNDTABLES: TWO-SIDED MARKETS
11, 11 (Organisation for Economic Co-operation and Development Competition Committee,
2009). See also, e.g., Gürkaynak et al., supra note 1, at 101–05; Jan Ondrus et al., The Impact of
Openness on the Market Potential of Multisided Platforms: A Case Study of Mobile Payment
Platforms, 30 J. INFO. TECH. 260, 261 (2015); David Evans, Background Note, in POLICY
ROUNDTABLES: TWO-SIDED MARKETS 23, 29 (Organisation for Economic Co-operation and
Development Competition Committee, 2009); David S. Evans & Richard Schmalensee, The
Industrial Organization of Markets with Two-Sided Platforms, 3 COMPETITION POL’Y INT’L 151,
152 (2007); Renata B. Hesse & Joshua H. Soven, Defining Relevant Product Markets in
Electronic Payment Network Antitrust Cases, 73 ANTITRUST L.J. 709, 714 (2006). In contrast,
Andrei Hagiu and Julian Wright believe that “network effects are neither necessary nor sufficient”
in defining multisided platforms. Andrei Hagiu & Julian Wright, Multi-sided Platforms, 43 INT’L
J. INDUS. ORG. 162, 164 (2015).
3 Evans, supra note 2, at 29.
4 In the context of multisided markets, network effects have also been referred to as cross-group
externalities or indirect externalities. See, e.g., Mark Armstrong, Competition in Two-Sided
Markets, 37 RAND J. ECON. 668 (2006); Secretariat, supra note 2, at 11.
5 Evans, supra note 2, at 29. Network effects may be either direct or indirect. “Direct network
effects arise where users of the product interact with each other, so having more users makes the
product more useful and valuable.” Secretariat, Executive Summary, in THE DIGITAL ECONOMY 5,
8 (Organisation for Economic Co-operation and Development Competition Committee 2012).
6 See, e.g., Evans, supra note 2, at 24 (referring to situations where the sides exhibit unbalanced
network effects); Secretariat, supra note 2, at 12 (same).
7 See, e.g., Evans & Schmalensee, supra note 2, at 159 (describing a feedback loop created by
raising prices on one side of a platform).
8 Advertisers might convey information about available goods and services. See, e.g., Evans &
Schmalensee, supra note 2, at 155–156 n.10. Nonetheless, users do not join a platform seeking

advertising in the same way that they seek the platform’s primary content or services (as shown by
the fact that on some subsidy platforms, users opt to pay to avoid ads (e.g., Pandora Premium).
9 See David S. Evans & Richard Schmalensee, The Antitrust Analysis of Multisided Platform
Businesses, in THE OXFORD HANDBOOK OF INTERNATIONAL ANTITRUST ECONOMICS 404, 410
(Blair & Sokol eds., 2015) (observing that most advertiser-supported media combine content with
advertising to attract consumers).
10 See Evans, supra note 2, at 24 (referring to situations where the sides exhibit unbalanced network
effects); Secretariat, supra note 2, at 12 (same).
11 Cf. Evans & Schmalensee, supra note 9, at 429 n.29 (noting that studies of the newspaper industry
suggest that advertising does not produce positive or negative externalities for readers, but other
forms of advertising may be valued by consumers).
12 Uber is an online platform that connects people seeking car rides (“riders”) with people who are
willing and available to offer rides (“drivers”). Uber sets the fare for a ride and then charges the
driver a percentage of each trip’s fare as a fee.
13 See, e.g., U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines §10 (2010)
[hereinafter 2010 Horizontal Merger Guidelines]. While merging parties have raised affirmative
defenses based on efficiencies, no such defense has succeeded in saving a transaction that was
otherwise found by the court to be anticompetitive. See, e.g., FTC v. Penn State Hershey Med.
Ctr., 838 F.3d 327, 347-48 (3d Cir. 2016); FTC v. H.J. Heinz Co., 246 F.3d 708, 720-22 (D.C.
Cir. 2001); FTC v. University Health, 938 F.2d 1206, 1222-24 (11th Cir. 1991).
14 See United States v. Microsoft Corp., 253 F.3d 34, 59 (D.C. Cir. 2001) (stating that greater
efficiency can constitute a defendant’s “procompetitive justification for its conduct”).
15 2010 Horizontal Merger Guidelines, § 10 (“[I]t is incumbent upon the merging firms to
substantiate efficiency claims so that the Agencies can verify by reasonable means the likelihood
and magnitude of each asserted efficiency, how and when each would be achieved (and any costs
of doing so), how each would enhance the merged firm’s ability and incentive to compete, and
why each would be merger-specific”).
16 See, e.g., 2010 Horizontal Merger Guidelines § 10 (“Cognizable efficiencies are merger-specific
efficiencies that have been verified and do not rise from anticompetitive reductions in output or
service.”); 3 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW: AN ANALYSIS OF
ANTITRUST PRINCIPLES AND THEIR APPLICATION ¶ 658f (4th ed. 2015) (“Thus when courts speak
of the business justification defense as requiring some showing of ‘efficiency,’ that term should be
understood to refer to the costs or output of the monopolist itself (productive efficiency), not to
the market as a whole (allocative efficiency).”).
17 AREEDA & HOVENKAMP, supra note 13, at ¶ 658f; 2010 Horizontal Merger Guidelines § 10
(efficiencies that “reduce the incremental cost of production” are more likely to be cognizable); In
both the merger and the unilateral conduct contexts, courts and agencies appear to require that
efficiencies increase consumer welfare in order to be cognisable. See, e.g., 2010 Horizontal
Merger Guidelines § 10; Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1183
(1st Cir. 1994) (“In general, a business justification is valid if it relates directly or indirectly to the
enhancement of consumer welfare.”).
18 United States v. Am. Express Co., 838 F.3d 179, 197-98, 202-05 (2d Cir. 2016) (holding that what
mattered was the adverse effect on competition “as a whole” and that the whole market included
both sides); Case C-67/13 P, Groupement des Cartes Bancaires (CB) v. Comm’n, 2014 E.C.R.
2204.

19 See, e.g., Lapo Filistrucchi et al., Assessing Unilateral Effects in a Two-Sided Market: An
Application to the Dutch Daily Newspaper Market, 8 J. COMP. L. & ECON. 297, 301 (2012)
(providing example of how a newspaper that raises the subscription price should account for the
“negative effect on advertising revenues as decreased circulation leads to a decline in the demand
for advertising”).
20 If the multisided market has more than two sides, it is possible that the side is involved in multiple
relationships. For example, if Pandora, an online radio station, takes an action against users, the
users will be in both (1) a subsidy-based relationship with the advertisers, and (2) a service-based
relationship with the musicians providing content.
21 Evans & Schmalensee, supra note 9, at 428 (“[A]ll else equal a merger of multisided platforms
would ordinarily increase indirect network externalities by increasing the size of all customer
groups and thereby provide efficiency benefits”).
22 See 2010 Horizontal Merger Guidelines § 1 (“Enhancement of market power by sellers often
elevates the prices charged to customers.”).
23 Minjae Song, Estimating Platform Market Power in Two-Sided Markets with an Application to
Magazine Advertising 30–33 (Simon School, Working Paper No. FR 11-22, 2013), available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1908621.
24 Filistrucchi et al., supra note 22, at 325-26.
25 Id. at 326.
26 See, e.g., id.; Song, supra note 29; Przemyslaw Jeziorski, Effects of Mergers in Two-Sided
Markets: Examination of the U.S. Radio Industry, 6 AM. ECON. J. MICROECONOMICS 35, 36
(2014) (empirical study of consolidation in U.S. radio industry from 1996 to 2006 found merger
wave resulted in 6% increase in prices to advertisers).
27 See Song, supra note 29.
28 Id. at 32.
29 Id. at 33.
30 See id.

PART VI. VERTICAL RESTRAINTS │ 199
Part VI. Vertical Restraints

9. SUGGESTIONS WHEN ASSESSING VERTICAL RESTRAINTS IN MULTI-SIDED PLATFORMS │ 201
9. Suggestions for competition authorities when assessing

vertical restraints in multi-sided platforms
By Paul A. Johnson 1
This note discusses some key questions that investigations should consider when
assessing vertical restraints in multi-sided platforms. It is composed of three main
sections. The first formulates a threshold question: when should we apply the economics
of platforms to an analysis of vertical restraints? The last two sections, assuming the
previous question has been answered affirmatively, address the economic assessment of
anticompetitive and procompetitive effects of vertical restraints in platforms.
1. Preliminaries: when should we apply the economics of platforms?
Platforms, equivalently termed “two-sided markets” or “multi-sided markets,” are

intermediaries. While the economic literature does not provide a consensus definition,
Marc Rysman takes the pragmatic view that the definition should be one of degree: “The
interesting question is often not whether a market can be defined as two-sided—virtually
all markets might be two-sided to some extent—but how important two-sided issues are
in determining outcomes of interest.” 1
For an example that is technically a platform but where there is no need to apply the
economics of platforms, Rysman provides the example of a given make of automobile
where the two users are consumers and mechanics. To some extent, the more consumers
purchase automobiles of the make, the more mechanics will specialise in servicing that
make and vice-versa: usage by either side of the “automobile platform” increases with
usage on the other side. But while an automobile may technically be a platform, an
analysis of vertical restraints in the sale of automobiles can ignore the mechanic side
because it is unlikely that quantities on one side significantly affect quantities on the other
side.
At the other extreme is a platform where the quantity on one side necessarily increases
with quantity on the other side. For example, every (non-carpooling) ride facilitated
through a ride-sharing service involves exactly one driver and exactly one (paying) rider.
Similarly, a payment card platform has the property that literally every purchase involves
exactly one merchant and exactly one consumer. Because a merchant cannot transact
without a consumer, there is no sense in which a “merchant transaction” can happen
without a “consumer transaction.” Nor is there necessarily a sense in which one user is
more important than the other: the platform provides a transaction service jointly and
indivisibly to both merchants and consumers. Similarly, while a merchant pays the
1
Partner, Bates White Economic Consulting and T.D. MacDonald Chair in Industrial Economics,
Competition Bureau of Canada. Email: paul.johnson5@canada.ca

202 │ 9. SUGGESTIONS WHEN ASSESSING VERTICAL RESTRAINTS IN MULTI-SIDED PLATFORMS
network a “merchant price,” for every merchant price it receives, the platform also
receives a “consumer price” (which can be a negative price indicating that consumers are
paid to use the card). By providing the transaction service, the platform retains the sum of
the two prices, a property first recognised by then-US Department of Justice Assistant
Attorney General Baxter. 2 Correctly defining the notion of “price” is critical when
assessing whether a vertical restraint allows a payment card platform to expand or
preserve its market power (i.e., charge a supracompetitive price).
Other examples lie between that of an “automobile platform” and a ride-sharing or
payment card platform. For example, a newspaper can change the number of
advertisements it sells without the number of subscribers automatically changing, and
vice-versa. The Google search engine is similar in that advertisements do not always
appear after a search. Moreover, the Google platform is broad in that it offers a number of
other services to consumers beyond search. Some of these services, like Google Scholar,
never appear to show advertising. Thus, Google can change the number of advertisements
it shows to users without users changing the intensity of their engagement with the
platform. Amazon is similar. While every transaction on Amazon Marketplace involves
exactly one consumer and one third-party merchant, Amazon earns revenues from
multiple products (e.g., retail offerings offered by Amazon, streaming video, an appstore,
tablets). Amazon could draw more users to its platforms with these other products and
thereby increase third-party merchant sales on Amazon marketplace. However, such an
increase is not an automatic and necessary result of increased user participation on the
platform.
The difference in these examples can be appreciated without resorting to sophisticated or
nuanced economic reasoning. Instead, the difference is driven by the degree to which
quantity transacted on one side changes with quantity transacted on the other side; “fixity
of use” will refer to this degree. It differs from network effects, usually defined with
reference to benefits of membership increasing as other users join, in that fixity of use
emphasises use. 3 The importance of fixity of use may not be always appreciated. For
example, some maintain that a “mature” payment card network is not two-sided based on
a claim that the magnitude of network effects diminishes as a platform “matures” (i.e., as
network effects diminish). 4 That conclusion incorrectly ignores a platform’s need to
encourage use by its members independent of its “maturity.” And, at a more basic level,
that conclusion incorrectly ignores the fixed-proportions nature of a payment card
platform and does not recognise the price the platform receives from facilitating a
transaction.
To appreciate fixity of use further, recognise the difference between use of a service
offered by a platform and membership on a platform. For example, riders and drivers can
choose to become members of a ride-sharing platform after which they choose how
intensively to use that platform. In that sense, there is not necessarily “fixity of
membership” in a ride-sharing platform: the number of riders that have an Uber account
can change without the number of drivers changing. Similarly, the number of merchants
that accept a particular payment card can change independent of the number of consumers
who hold the card. Depending on whether an investigation centers on transaction-specific
fees or on the fees paid by users that are independent of usage, that distinction is
important to recognise. 5 For example, suppose that it is determined that merchant
acceptance of a payment card is not affected by a small change in the number of
consumers who hold the card. In that case, an analysis of any membership fees merchants
pay to accept the card need not consider annual fees paid by consumers. That conclusion,
however, does not change the fact that every usage of the payment platform necessarily

implicates exactly one merchant and exactly one consumer and that the payment platform
retains the sum of the merchant and consumer prices.
The degree of fixity of use should be determinative of whether a platform’s services and
prices are assessed akin to a payment platform (i.e., where multi-sided principles are
important) or akin to an automobile “platform” (i.e., where multi-sided principles can be
ignored). 6 As a simple illustration, suppose a platform seeks to improve the match
between two sets of users, who are charged very different prices and offered very
different services. As a first step, one might consider whether it is meaningful to consider
the terms offered to one set of users independent of the terms offered to the other set of
users. The degree of fixity of use should be determinant because the analysis should
reflect the platform’s business realities: as fixity of use disappears, the platform treats the
two sides independently. 7 In other words, if the two sides operate reasonably
independently, then an analysis can reliably analyse either side independent of the others.
However, when the operations of both sides of the platform are reasonably tightly linked,
a reliable analysis should consider both sides jointly. That statement operates
independently of, for example, how antitrust markets are defined or how strong network
effects are because it speaks to the price that is relevant to the platform. The overall price
relevant to the platform can be calculated as the quantity-weighted average of prices paid
by each side. 8
2. Assessing the anticompetitive effects of vertical restraints in platforms
By definition, vertical restraints restrain some expression of competition. This section

considers only these anticompetitive effects by suggesting three questions for competition
authorities to consider.
Who are the victims and beneficiaries of the vertical restraint?

A coherent theory about the anticompetitive effects of a vertical restraint should identify
the victims and the beneficiaries of that restraint in a manner consistent with economic
logic. That logic starts with some results associated with the Chicago school and
continues by leveraging insights developed in the literature since. 9
One application of the famous Coase theorem is that a buyer and seller will trade when
the buyer’s valuation exceeds the seller’s cost so long as information is complete and
bargaining costs are small. 10 For this reason, modern antitrust holds a presumption that
when sophisticated parties negotiate, they sign agreements that maximise the joint value
available to them regardless of the relative bargaining power of the parties. In other
words, signed contracts are presumed to be “bilaterally efficient.” A corollary to this
result is that a vertical restraint will appear in a contract if and only if it is bilaterally
efficient. 11 That is not to say that all vertical restraints, or even all agreements more
generally, are competitively benign. Even if a contract is bilaterally efficient, it can affect
third parties. A very plain example is a cartel whose members agree to maximise
producer surplus but, because consumers are not party to the cartel negotiations, do not
agree to maximise total surplus. To take another example, a platform may sign a contract
with one set of users that prevents other platforms from competing. That contract can
make the platform and the set of users that signed the contract better off at the expense of
other users of a platform as well as competing platforms. Effects on third parties, known
as “contracting externalities,” are foundational to modern theories of harm from vertical
restraints. 12

Another important implication of economic logic is that a vertical restraint cannot be the
source of bargaining power but is the result of bargaining power. That implication leads
to the conclusion that a vertical restraint that limits one entity’s actions is accompanied by
prices, or other terms, that compensate for that limitation. 13 For example, if a vertical
restraint moves some risk from a buyer to a seller, then the price paid to the seller must
increase in compensation. The inclusion of such a vertical restraint cannot somehow
endow the buyer with bargaining power because such a claim is circular (i.e., the restraint
would have to create the bargaining power that was necessary for its imposition it in the
first place).
The logic of the previous two paragraphs is not always explicitly recognised in economic
models that study vertical restraints. That is not to say that the logic is not widely
accepted—it is—rather, the omission reflects a deliberate choice to simplify and focus
economic models on a small set of issues. For example, a model may analyse the effects
of a vertical restraint by comparing outcomes with and without the vertical restraint while
holding all else constant and imposing some restriction on the form that contracts can
take (e.g., linear pricing). This analysis implicitly compares two very different settings
(specifically, two very different extensive form games) where the relative bargaining
power of the parties differs substantially. In richer settings, firms will react to a ban on
the vertical restraint by changing aspects of their behavior that the model’s restrictive
assumptions do not permit. For example, if an entity has power and the ability to impose
a restraint, it also has the option to exercise that power differently—say simply by
charging a higher price. While economic models may abstract away from such important
issues relating to the existence of a vertical restraint, that abstraction does not allow
enforcement authorities to do the same.
An interesting application of the logic of vertical restraints is evident in the United States
Department of Justice (USDOJ) complaint against Blue Cross Blue Shield of Michigan
(BCBSM). 14 BCBSM might be viewed as a platform because it serves two separate sets
of entities: hospitals and payers of health insurance. USDOJ alleged that BCBSM signed
contracts that included most favored pricing terms with certain hospitals in Michigan,
which committed the hospitals to sell BCBSM medical services at prices that were lower
than any other entity received. USDOJ alleged that the effect of these terms was to limit
competition in certain markets by limiting the competition that BCBSM faced. Notably,
the complaint alleged that BCBSM obtained most favored pricing terms from some
hospitals “by agreeing to increase its payments to the hospital.” 15 The victims, thus, were
not the hospitals who signed contracts with the vertical restraint—they received higher
payments—but were third party payers of health insurance and competing health
insurance providers.
This discussion implies that not only should competition authorities have a strong
presumption that vertical restraints are bilaterally efficient (although not necessarily
socially efficient), but that they should be cognisant that the complaints they hear may be
driven by pre-existing market power rather than a legitimate harm to competition.
Specifically, parties who have signed a vertical restraint may not be “happy” with the
price or services they receive even if the vertical restraint is procompetitive. Ultimately, a
complaint may simply reflect a perception of a lack of bargaining power and be unrelated
to any anticompetitive effects of the vertical restraint. This danger is most acute when the
complainants are managers whose job responsibilities are narrowly circumscribed to
achieve as low (or high) a price as possible without having a broader understanding of
their firm’s operations.

What nature of harm does the theory imply?

A platform serves at least two distinct users and, as such, charges at least two different
prices. So long as quantity provided to one user increases significantly with the quantity
provided to other users (i.e., fixity of use is significant), one can define an overall level of
price, which determines the profitability of the platform, and describe how that overall
price is allocated to the different users. A vertical restraint may also affect prices paid by
those who do not use the platform. In assessing theories of harm, a competition authority
should carefully consider whether those theories imply harm through an increase in the
overall price, the allocation of that price, or an increase in the price to others.
The most straightforward theory of harm implies an increase to the overall price relevant
to the platform, which is equivalent to the standard monopoly distortion. For example,
one such theory might involve the use of exclusive dealing provisions that limits the
ability of other platforms to compete. Such a loss of competition might lessen an
important competitive constraint on the platform and allow it to raise prices to all users
and, thereby, the overall level of price.
A second and more subtle theory of harm considers no increase in the overall price, and
hence no increase in the profits of the platform, but, instead, focuses on how that overall
price is allocated among different users. More specifically, the theory holds that the
vertical restraint distorts the allocation of prices among different users without leading to
additional profits for the platform. This type of distortion is akin to that described in the
literature on “aftermarkets,” which involve complementary goods or services purchased
by a single user, so are not a platform. An important question in that setting is whether
antitrust should be concerned with market power in an aftermarket when competition in a
“foremarket” is vigorous. Perhaps the most widely studied example of aftermarkets stems
from the US Supreme Court’s Kodak decision, 16 which analysed the effects of tying
aftermarket maintenance (maintenance of copiers) to purchases in a foremarket (purchase
of a copier). Carl Shapiro has shown that tying an aftermarket to a competitive foremarket
causes there to be “too much” consumption in the foremarket and “too little”
consumption in the aftermarket (e.g., new copiers are purchased too frequently and
existing copiers are serviced too infrequently). He argues, however, that these distortions
in how the overall price is allocated result in de minimis loss and are not worthy of
attention from antitrust. 17
A third theory of harm highlights the implications to parties not bound by the vertical
restraint. While such theories adopt strong simplifying assumptions, they still face hurdles
due to the complicated nature of the environments in which platforms operate.
As an example, consider the model proposed by Marius Schwartz and Daniel Vincent that
investigates the welfare effects of a vertical restraint—a no surcharge rule or “NSR”—in
the context of a highly stylised model of a payment card network. 18 The model imposes
the NSR so cannot answer the questions highlighted above in section 0. . Some intuition
can be gleaned by recognising that an NSR effectively sets a price ceiling for one good
that is no higher than prices of other goods. In the Schwartz and Vincent model, the two
goods are the act of purchasing with a credit card and the act of purchasing with cash.
The vertical restraint limits the price consumers pay when using a credit card to be no
higher than the price they would pay if they used cash. Because the cash price is a choice
variable for the retailer, an NSR will cause the cash price to differ from that absent the
restraint. In other words, an NSR will cause merchants to change both the cash and credit
prices. In the Schwartz and Vincent model, an NSR causes the credit price to decrease
and the cash price to increase. 19 (It is in this sense that Joseph Farrell has characterised an

NSR as a means for a payment network to “tax” rival payments methods. 20) In general,
the effects on consumer welfare are ambiguous. The merchant’s market power distorts the
credit price away from optimal levels and an NSR mitigates this effect; however, the NSR
introduces additional distortions (namely an increase in the cash price as well as a
distortion in the fees charged by the payment card network) that can outweigh its
efficiency enhancing effects. In the Schwartz and Vincent model an NSR can either
increase or decrease consumer surplus and total surplus.
How are the restraint’s effects transmitted to other sides of the platform?
In assessing a vertical restraint, some jurisdictions balance any anticompetitive effects
against any procompetitive effects. When a platform is not at issue, a single set of
consumers feels the effects of those opposite effects. In a platform, however, those
opposite effects may be felt by distinct sets of users. This dynamic suggests that
competition authorities should analyse whether and how effects of vertical restraints are
transmitted across different sides.
As an example, consider the United States Department of Justice’s (USDOJ) case against
BCBSM, which involved most favoured pricing terms and was described in section 0. .
One approach might be to weigh the procompetitive and anticompetitive effects of the
restraints considering only the relationships between hospitals and insurance companies.
According to one such anticompetitive theory, those hospitals that had not incorporated
the vertical restraint into their contracts would suffer from an elimination of competition
among insurance companies; those hospitals that had incorporated the vertical restraint
into their contracts could benefit. USDOJ, however, noted that higher prices paid to
hospitals by BCBSM likely result in higher prices paid by a different set of users: payers
of health insurance. Specifically, USDOJ noted that one set of payers, known as “self-
funded” payers pay for their own healthcare claims. 21 Such payers would be harmed
because they pay more when hospital prices increase. USDOJ also noted that state law
allowed BCBSM to base the premiums of “fully insured” payers on historical healthcare
costs “so increases in local hospital prices can lead directly to increased premiums.” 22
More generally, a vertical restraint on one side of a platform, by definition, restrains an
expression of competition on that side. However, it can also have effects on other sides of
the platform. In principle, those effects can benefit or harm the other side. USDOJ’s
complaint against BCBSM is an example where a vertical restraint on one side harms
users on another side. Another theory might hold that a vertical restraint limits
competition on one side but ultimately benefits users on another side due to a shift in the
locus of competitive vigour. (In this context, it is useful to keep in mind that a vertical
restraint must be bilaterally efficient before parties accept it, so it is necessary to explain
why users on one side are better off by agreeing to a vertical restraint that limits one
expression of competition on their side.)
The term “waterbed effect” has been used in the telecommunications literature to describe
the effect of fixed-to-mobile termination rates on the prices paid by mobile telephone
users. 23 Empirical analysis in that literature has exploited shifts in regulation over time to
estimate how different sets of users are affected. In principle, such an approach could be
used more generally to estimate how effects of vertical restraints are transmitted across
platforms. 24

3. Assessing the procompetitive effects of vertical restraints in platforms
While vertical restraints restrain, they can also enable expressions of competition. Thus,
an analysis that focuses exclusively on what a restraint prevents without considering what
it enables is incomplete. This section discusses two common procompetitive justifications
for vertical restraints in platforms.
Is free riding a procompetitive justification?

Jean-Charles Rochet and Jean Tirole distinguish between a merchant’s ex ante and ex
post incentives to accept a payment card:
Retailers often complain that they are “forced” to accept card transactions that
increase their net costs. To understand this “must-take card” argument, one must
distinguish between ex post and ex ante considerations. Once the customer has
decided to buy from the retailer, it is in the latter’s interest to “steer” the former
to pay by cash or check instead of by card whenever ps>bs. But from an ex ante
point of view, the retailer must also take into account the increase in store
attractiveness brought about by the option of paying by card. Because retailers ex
ante can always turn down cards, the “must-take card” argument refers to the ex
post perspective. 25
In this discussion, the merchant has an incentive to advertise acceptance of the card to
generate increased custom only to steer customers away from using that card once they
have started the process of a purchase. This conflict of incentives leads to a free rider
problem that some claim may be resolved with a vertical restraint that restricts merchant
behaviour at the point-of-sale. The fact that a merchant and a consumer may transact off
the platform that brought the two users together in the first place is the key element of an
argument about free riding on platforms. That element may be important in platform
applications beyond payment cards. For example, an online travel site may match a
traveller and a hotel only to have the traveller and hotel transact off-platform at a price
that is more attractive to each. Similarly, drivers and riders could find each other on a
ride-sharing platform only to bypass the platform and share the savings.
In assessing whether a vertical restraint can help resolve a free-riding problem,
competition authorities might usefully consider three questions.
• Is the platform responsible for bringing the users together? If the platform did not
bring the users together then the platform’s investments are not susceptible to free
riding. However, a finding that the platform does not affect the matches users
make is a finding that the platform has no market power, which is usually a
predicate to a finding that a vertical restraint has an anticompetitive effect. For
example, if travellers would have booked at a particular hotel regardless of the use
of any booking platform, that hotel would lose no custom by ending its
participation in the platform.
• What investments are susceptible to free riding if a transaction happens off the
platform? When users transact off the platform, the platform avoids any expense
associated with the transaction; such costs are not susceptible to free riding.
Nevertheless, it is possible that the platform made investments that were
responsible for bringing the users together. For example, in the context of the
Rochet and Tirole payment card example, customers are attracted to a merchant
that claims to accept a particular payment card in the anticipation of rewards and
services they have come to expect from using their card in the past.

• Can free riding be resolved in other ways? Theory allows for multiple ways to
solve free riding. For example, the platform could discontinue to serve offending
users. Alternatively, a platform might be able to use a fee structure that involves a
lump-sum payment that eliminates any incentive to free ride. Asking whether a
vertical restraint is the “least restrictive alternative” is, thus, not possible to
answer generally, but an important question to answer within a specific context.
Does the restraint preserve the platform’s viability? Is that a procompetitive

effect?
Platforms typically exhibit network effects. And when platforms compete, such network
effects may cause markets to “tip” to a single platform. 26
In theory, platforms can use vertical restraints either to encourage or to prevent tipping.
For example, a “big” platform could use an exclusivity clause with one set of users to
increase industry concentration. Perhaps more surprisingly, a “small” platform could also
use the same kind of exclusivity clause to decrease industry concentration. That latter
possibility is not purely theoretical as Robin Lee’s empirical analysis of exclusivity by
video game platforms demonstrates. 27 An important result of that study is that entrant
platforms leveraged exclusives in software as a means of differentiating themselves from
the larger incumbent. 28
In assessing whether a vertical restraint can help spur competition by ensuring the
viability of smaller platforms, competition authorities might usefully consider a two-part
test. The first part of that test asks whether the vertical restraint, in fact, ensures the
viability of the smaller platform. Answering that question in the affirmative, however, is
not sufficient to conclude that the vertical restraint is necessary for competition because it
may protect a competitor without protecting competition. The second part of that test
requires consideration of an additional question: Is the presence of the smaller platform
critical to competition in the market? It bears emphasising that a vertical restraint may fail
this test without being anticompetitive. In that case, obviously, a lack of a procompetitive
justification should not trouble a competition authority.
Notes
1 Marc Rysman. “The economics of two-sided markets.” The Journal of Economic Perspectives 23,
no. 3 (2009): 125-143, 127.
2 William F. Baxter. “Bank interchange of transactional paper: Legal and economic perspectives.”
The Journal of Law & Economics 26, no. 3 (1983): 541-588, 545. (“Perhaps the most intuitively
appealing way to resolve the difficulties posed by this market model is to redefine what we mean
as one unit of the product consumed. Rather than considering the demands of [the purchaser] P
and [the merchant] M as demands for separate products, define one unit of product to consist of
the bundle of transactional services that banks must supply jointly to P and M in order to facilitate
the execution of one exchange of goods or services between P and M. Under this interpretation,
the supply price of the product is the sum of the individual charges to P and to M. Furthermore,
the demand for that product is a joint demand of P and of M: in combination they must make a
payment of that magnitude to the banks to induce the necessary supply, but independently neither
P nor M necessarily confronts any particular price as one he must pay in order to have his demand
fulfilled.”)

3 Michael L. Katz and Carl Shapiro. “Systems competition and network effects.” The Journal of
Economic Perspectives 8, no. 2 (1994): 93-115, 94. (“Because the value of membership to one
user is positively affected when another user joins and enlarges the network, such markets are said
to exhibit ‘network effects,’ or ‘network externalities.’”)
4 For example, see Alan S. Frankel and Allan L. Shampine. “The economic effects of interchange
fees.” Antitrust Law Journal 73, no. 3 (2006): 627-673, 655. (“By its nature, a network externality
is likely to become less important . . . as a network matures.”).
5 For example, some credit cards charge consumers an annual fee that is independent of usage. In
the United States, Visa charges some merchants a “fixed acquirer network fee” that may be
independent of usage.
6 Jean-Charles Rochet and Jean Tirole have defined a platform to be “one-sided” if the volume of
transaction depends only on the aggregate price level and not on the structure. But because their
focus appears to be mainly on payment platforms and other platforms where fixity of use is
perfect (e.g., bilateral electricity trading), their definition identifies instances when parties can
negotiate bilaterally to “undo” any particular price structure and not on the extent to which
quantity on one side could increase independent of quantity on other sides. See Jean‐Charles
Rochet and Jean Tirole. “Two‐sided markets: a progress report.” The RAND Journal of Economics
37, no. 3 (2006): 645-667, 648.
7 To be more specific, consider a platform with two sides, A and B. To simplify, suppose that use
by side B is relevant to side A, but use by side A is not relevant to side B. Costs to serving either
side are zero. In this case the profit of the platform can be written as 𝜋𝜋 = 𝑃𝑃𝐴𝐴 𝑄𝑄𝐴𝐴 �𝑃𝑃𝐴𝐴 , 𝑄𝑄𝐵𝐵 (𝑃𝑃𝐵𝐵 )� +
𝜕𝜕𝜕𝜕
𝑃𝑃𝐵𝐵 𝑄𝑄𝐵𝐵 (𝑃𝑃𝐵𝐵 ). The first-order condition of profit with respect to the side-B price is =
𝜕𝜕𝑃𝑃𝐵𝐵
𝜕𝜕𝑄𝑄𝐴𝐴 𝜕𝜕𝑄𝑄𝐴𝐴
𝑃𝑃𝐴𝐴 𝑄𝑄𝐵𝐵′ (𝑃𝑃𝐵𝐵 ) + 𝑄𝑄𝐵𝐵 + 𝑃𝑃𝐵𝐵 𝑄𝑄𝐵𝐵′ (𝑃𝑃𝐵𝐵 ) = 0. The term reflects fixity of use. The first term in the
𝜕𝜕𝑄𝑄𝐵𝐵 𝜕𝜕𝑄𝑄𝐵𝐵
first-order condition approaches zero as fixity of use disappears leaving only the latter two terms.
The latter two terms represent the standard first-order condition if side B were independent of A.
8 For example, in a two-sided platform with sides A and B, the quantity-weighted average of the
𝑄𝑄 𝑄𝑄
prices paid by each side is 𝑃𝑃 = 𝑃𝑃𝐴𝐴 𝐴𝐴 + 𝑃𝑃𝐵𝐵 𝐵𝐵 .
𝑄𝑄𝐴𝐴 +𝑄𝑄𝐵𝐵 𝑄𝑄𝐴𝐴 +𝑄𝑄𝐵𝐵
In some cases, however, the price to one side may be set to zero and platforms compete by
providing services to attract users. In theory, a platform’s profits are affected in the same way
whether it spends a dollar on providing a service or it spends a dollar lowering the price. In
practice, quantifying the costs of providing these non-price attractions may be challenging.
9 An excellent reference is Chapter 4 of Michael D. Whinston. “Lectures on Antitrust Economics.”
MIT Press Books 1 (2008).
10 The proof is easy and instructive. A buyer and seller are negotiating to trade an item. The buyer
values the item at v dollars; the seller values the item at c dollars. Suppose gains to trade exist
(i.e., v-c>0), but the parties do not trade. Either the buyer or seller could propose a price between
c and v that, if accepted, would leave both sides strictly better off. Doing so is possible because c
and v are common knowledge; doing so is also nearly costless because bargaining costs are small.
11 First suppose that the clause is in the contract but it is inefficient. The buyer and seller can both be
made better off if the clause is taken out, so they will take it out. Next suppose that the clause is
efficient but is not included in the contract. Again, by including the clause, each party can be
made better off by including it, so they will include it.
12 Whinston, supra note 9 at 140, writes “In recent years, a number of authors have shown how
sensible alterations to this Chicago School model can make exclusive contracts a profitable
strategy for excluding rivals. These models all have the feature that some form of externality

arises from an exclusive contract signed by two parties onto other individuals, and this externality
makes the contract jointly optimal for the contracting parties.”
13 An exception involves an incumbent seller who can make sequential offers to a large number of
buyers to exclude potential rival sellers. In that setting, the compensation to the buyers for signing
an exclusive contract approaches zero. In this way, signatories to vertical restraints can be harmed
not by their own restraints (which do not harm them but offer little compensation), but through the
agreements others sign that foreclose entry. See Eric B. Rasmusen, J. Mark Ramseyer, and John S.
Wiley Jr. “Naked exclusion.” The American Economic Review (1991): 1137-1145 and Ilya R.
Segal and Michael D. Whinston. “Naked exclusion: comment.” The American Economic Review
90, no. 1 (2000): 296-309.
14 Complaint, United States and State of Michigan v. Blue Cross Blue Shield of Michigan. Case
2:10-cv-14155-DPH–MKM. Available at https://www.justice.gov/atr/case-
document/file/489536/download.
15 Id. ¶ 44. See also ¶¶ 40, 49, 58, 60, 68, 75.
16 Eastman Kodak Co. v. Image Technical Services, Inc., 504 US 451 (1992).
17 Carl Shapiro. “Aftermarkets and consumer welfare: Making sense of Kodak.” Antitrust Law
Journal 63, no. 2 (1995): 483-511, 497. (“I am not convinced that this type of consumer injury is
worthy of the attention of antitrust laws.”)
Setting aside whether such a distortion ought to be worthy of attention from an antitrust authority,
much of the literature has concluded that market power may create distortions of ambiguous sign
on how platforms allocate the price among different sides. In other words, while market power
may introduce a distortion in how the total price is allocated among the sides, that distortion does
not necessarily favor one side or another. Glen Weyl analogises this distortion to the more familiar
result, due to Michael Spence, that a monopolist may either over- or under-provide quality
depending on the nature of heterogeneous consumer tastes for quality. E. Glen Weyl. “A price
theory of multi-sided platforms.” The American Economic Review 100, no. 4 (2010): 1642-1672.
18 Marius Schwartz and Daniel R. Vincent. “The no surcharge rule and card user rebates: Vertical
control by a payment network.” Review of Network Economics 5, no. 1 (2006).
19 Suppose that a merchant sells two goods that are independent in the sense that the price of one
good does not affect demand for the other good. Furthermore, suppose that, without any
constraint, the merchant would choose to set a higher price for good 1 than for good 2. If the
manufacturer of good 1 requires that the merchant’s selling price of good 1 not exceed the selling
price of good 2 then, making some additional regularity assumptions, the merchant’s constrained
(single) profit maximising price for the two goods will fall between the unconstrained prices of
the two goods. The merchant will raise the price of good 2 to some degree because it is required to
do so in order to raise the price of good 1 closer to its preferred, unconstrained price.
20 Joseph Farrell. “Efficiency and competition between payment instruments.” Review of Network
Economics 5, no. 1 (2006).
21 Supra, note 14, ¶ 15.
22 Supra, note 14, ¶ 18.
23 Christos Genakos and Tommaso Valletti. “Testing the ‘waterbed’ effect in mobile telephony.”
Journal of the European Economic Association 9, no. 6 (2011): 1114-1142.
24 See Marc Rysman and Julian Wright. “The economics of payment cards.” Review of Network
Economics 13, no. 3 (2014): 303-353. section 5.2 for a discussion of some potential difficulties of
estimating waterbed-type effects in the case of payment cards.

25 Jean‐Charles Rochet and Jean Tirole. “Must‐Take Cards: Merchant Discounts and Avoided
Costs.” Journal of the European Economic Association 9, no. 3 (2011): 462-495, 467.
The notation ps>bs reflects the situation when the merchant’s private benefits of accepting the
card are lower than the price it pays to do so. Setting ps=bs reflects the “Baxter fee.” Importantly,
a merchant may have an incentive to accept cards even when the price exceeds the benefits due to
a “business stealing” effect.
26 Michael L. Katz and Carl Shapiro. “Systems competition and network effects.” The Journal of
Economic Perspectives 8, no. 2 (1994): 93-115.
27 Robin S. Lee. “Vertical integration and exclusivity in platform and two-sided markets.” The
American Economic Review 103, no. 7 (2013): 2960-3000.
28 One of the most profound implications of network effects for antitrust is the implied tradeoff
between quality and competition. Specifically, competition may grow with the number of
competitors, but the benefits of network effects may be lost as the industry becomes fragmented.
Lee argues that consumer welfare would have likely increased substantially with concentration in
video game platforms. Marc Rysman’s study of yellow pages found the opposite: despite the
presence of network effects, more competition increased welfare. Marc Rysman. “Competition
between networks: A study of the market for yellow pages.” The Review of Economic Studies 71,
no. 2 (2004): 483-512.

10. THE COMPETITION ANALYSIS OF VERTICAL RESTRAINTS IN MULTI-SIDED MARKETS │ 213
10. The competition analysis of vertical restraints in multi-sided markets
By Cristina Caffarra and Kai-Uwe Kühn 1
1. Introduction
The competition assessment of vertical restraints in multi-sided markets is an area of

remaining controversy and confusion across Europe. Failure to properly internalise the
economic insights of the past 30 years on the role of contractual restrictions between
vertically-related firms in traditional “one-sided” markets has carried over – amplified –
to multi-sided environments. The European Commission’s Vertical Guidelines of 2010
have been a missed opportunity to set out clear principles for enforcement, and
presumptions in favour of vertical restraints in traditional environments. These
shortcomings are coming back to haunt us in multi-sided platforms, online and e-
commerce – right at a time when firms are facing uncertainty and are rethinking their
distribution models, experimenting with multiple channels. 1
The current enforcement record is a heterogeneous patchwork of activity across Member
States. Various types of vertical restraints have been probed between online platforms
(providing various functionalities typically “for free” to consumers), and brands/sellers
using the platform as a distribution channel – including “best price clauses”/“MFNs”, and
platform exclusions of various kinds. The approach does not reflect a careful, systematic
application of economic principles but more often the persistence of idiosyncratic views
on the anticompetitive effects of vertical contracting (e.g. that manufacturers want to shut
down cheaper distribution channels “to keep prices high”, or that “best price clauses” are
inherently anticompetitive). On the one hand, agencies tend to regard platforms trying to
bring about uniform prices with other channels through MFNs as anticompetitive; while
at the same time, price discrimination resulting from platform exclusion decisions is also
regarded as anticompetitive. There is also limited effort to understand the efficiency
properties of such contracts and the motivation of firms using them to solve certain
problems (e.g. on a view that “free riding” does not exist).
The implication is that firms are scared to articulate their true motives for fear of being
misunderstood, and seeking alternative solutions to deal with their issues without being
caught in investigations. Some are structuring their online distribution much more “in-
house” as an integrated function; while platforms are redesigning certain functionalities to
“work around” perceived antitrust risks. This involves foregoing the experimentation
around new independent distribution formats which is needed to trial and test new ideas.
It also implies that investment are incurred in redesign and “workarounds” that may be
1
Paper submitted by Cristina Caffarran, Charles River Associates, and Kai-uwe Kühn, University
of East Anglia, Cepr and Dice

214 │ 10. THE COMPETITION ANALYSIS OF VERTICAL RESTRAINTS IN MULTI-SIDED MARKETS
redundant and displace more productive ones. As a result, online distribution of goods
and services in Europe is being held back and in danger of ending up a lot less varied and
efficient than it should be.
After a brief introduction to multi-sidedness and the questions we set out to consider
(Section 2), in Section 3 we explain how the key insight that vertical restraints are
motivated by contractual incompleteness carries over directly to multi-sided markets.
Similarly in Section 4 we argue that while multi-sidedness may appear to complicate
greatly the analysis of competitive effects, the assessment can be simplified to an
approach close to the approach to vertical restraints in more standard environments.
Where a new approach is truly needed is in developing and taking seriously the evidence
for the efficiency properties of these restraints, which tend to be systematically
overlooked or dismissed (Section 5). Compounding the current problem is the structure of
the law, which involves a sequential assessment of anticompetitive effects and
efficiencies and is particularly ill-suited to vertical restraints; and possibly the reality that
Industrial Organisation research continues to put too much emphasis on the details of
specific models and is not encouraging enforcers to look beyond analyses of short-term
price effects, at dynamic issues of investment and experimentation (Section 6). Building
on these considerations, in Section 7 we make a number of suggestions for a roadmap to
the analysis of these practices. Section 8 concludes.
2. Multi-sidedness and vertical contracting
Markets are described as “multi-sided” when they are organised around an intermediary
(a “platform”) with interdependencies in demand between agents performing and
obtaining services on various sides of the platform. While there are multiple classic
examples (TV and newspapers, payment cards), for purposes of this paper we focus on
digital platforms that connect different constituencies of users: consumers searching for
information and a product/service to “match” their requirements; sellers looking to realise
a sale; advertisers serving up adverts to match and anticipate users’ interests; and the
platform itself, looking to monetise its services (information, matching) through
advertising and various other sales commissions.
Multi-sided markets involve a number of characteristics: (a) there are typically network
externalities across the sides of the platform; (2) the platform has incentives to invest to
develop a user base as wide as possible on one side, so that it can monetise its investment
on the other side (e.g. through advertising revenues on the other side, and as well as
through commission on sales/bookings); (3) this typically involves offering an attractive
service “for free” (or at a low price) to build up customer base on one side quickly; and
(4) investments in functionalities which are provided to users for “free” are susceptible to
free riding if they are available to all, but there is a separate channel through which
purchases/bookings can be made.
The question we discuss in this paper is whether we need to make changes to the
competition analysis of vertical contracts in these settings. For instance, contracts that
introduce restrictions on the prices that can be charged by sellers across channels (e.g.
“best price clauses”); on the distribution channels that may be used (e.g. brands allowing
distributors to use certain online marketplaces but not others); and on branding and
features that may be displayed (e.g. prohibition to use a logo on a platform). Do we need
new insights and new tools to deal appropriately with these cases?

3. Contract incompleteness motivates vertical restraints also in multi-sided markets
A broad insight provided by economic analysis over the past 30-40 years on the
motivation for vertical restraints is that these give rise to anticompetitive effects only in
limited, very specific circumstances.2 Vertical co-ordination does not typically lower the
competitive pressure faced by a firm, but allows it to organise sales in a more effective
way. If a firm “restricts” its own downstream distribution, it does not affect directly its
competitors but restricts access to market of its own goods. As brand owners have an
interest in the distribution of their products being as competitive as possible, the question
is why would they limit the channels of distribution they use, or leave “money on the
table” in the form of a greater margin to the retailer? The most natural explanation in
most cases is that they can only be interested in doing so if this creates incentives for
beneficial activities that cannot be otherwise directly mandated and controlled. While
there is a literature on the anticompetitive effects of certain vertical restraints (e.g. the
classic case of RPM being used in order to solve a commitment problem between
manufacturer and retailer which arises with asymmetric information), theory does not
support a general presumptions against such restraints from a competition point of view.
Much of the empirical evidence from cross-sectional studies also supports the notion that
vertical restraints are benign and pro-competitive 3 (though again with exceptions 4).
Contractual incompleteness from the endogenous price structure in multi-sided

platforms
The insight from economic analysis on the motivation for vertical restraints in traditional
(“offline”) distribution formats is that these typically reflect the presence of some
externality, and an incomplete contracting problem which means the externality cannot
be resolved directly by writing a contract. For instance, a manufacturer cannot sign a
complete contract with a retailer/distributor mandating a given optimal level of “sales
effort/services”. This is because the manufacturer has asymmetric information on the
amount and effectiveness of the retailer’s “sales effort”, and therefore cannot specify the
optimal level of effort in a contract in a way that can be enforced. As a result, there is no
explicit compensation for “services” and the incentive needs to take the form of a
commission on sales achieved.
This same motivation holds a fortiori in an online environment: indeed it is arguably even
more difficult to write complete contracts for online distribution as it is difficult to
anticipate all of the ways in which an online retailer may do things the brand does not
like, and police this. But in a multi-sided setting there is an additional motivation for
contractual incompleteness, stemming from the pricing structure. Because a platform
tends to find it optimal to charge less to the more elastic side, and indeed charges nothing
in most cases, the “service level” offered by the platform cannot be priced and contracted
for separately to users. A sales/booking platform that does not charge users on the
consumer side may offer a rich functionality, including well-designed user interfaces and
real-time information on product availability, as well as proprietary algorithms to ensure
the best possible match between consumers’ heterogeneous preferences and the products
available – all services that benefit sellers too. Could the platform not charge the seller
directly for the search services it benefits from? The problem is there is no objective
measure of “quality of search” that can be explicitly contracted for: the only measurement
of the effectiveness of a platform for the seller is the extent to which it originates sales.
We thus have the same problem of contract incompleteness that arises with asymmetric
information in traditional environments; and in both situations an efficient way to reward

effort is to reward the outcome – i.e. link remuneration of the platform to a metric that
proxies for success: in practice, a commission on achieved sales.
The “catch” also in this case is that if people search on the platform but “convert” on a
channel with lower commission, there is no remuneration for the “sales effort” and no
reward for the platform’s investment in quality. If consumers use the search facility but
do not “convert” the search into a booking, other channels will be free riding on the
platform. Incompleteness of contracting combined with the structure of prices which is
optimal for the platform generate clear efficiency reasons for vertical restraints in these
environments.
Externalities, incomplete contracts and platform exclusion decisions

Restrictions on the use of platforms and marketplaces imposed by a manufacturer on
online distributors and retailers can also reflect specific externalities which cannot be
internalised because it is not possible to write complete contracts to that effect. “Selective
distribution” on the part of brands (i.e. the decision to selectively licence certain channels
for distribution but not others) has been traditionally associated with “luxury” goods and
brand owners wanting to “deselect” outlets that do not meet a certain standard of
presentation. In an online multi-sided environment there are additional reasons for
selective distribution. For instance, a platform/site may have different interests for how
consumers are searching and comparing, relative to the brand. Think of price comparison
websites which tend to steer comparisons towards prices alone, as they rank products
only in terms of price. Conversely, the brand may want the consumer to focus both on
price and quality, and comparisons to be made more in terms of price/quality trade-off
(because it may have product lines and may want consumers to consider products that
may cost more but are better). If these price/quality comparisons are suppressed and the
only comparisons are price-based, with cheapest products ranking first on the list, there
may be a vertical externality in terms of diverging incentives of platforms and sellers: the
mix of what is being shown and compared on the site based on price alone may be
distorted relative to what the brand wants to achieve.
These concerns may then lead brand owners to want to ensure their distributors do not
contract with certain marketplaces (“platform exclusion decisions”) because they do not
provide the type of service they want. The brand would like to be present on the
marketplace and provide incentives for it to develop in a certain direction (for instance,
include quality considerations when ranking the various offerings); but if that is not
possible because the platform/marketplace has a uniform policy towards resellers, then
the brand may prefer not to be on the marketplace at all. For instance, a brand which also
offers “upper end” products will want consumer to have visibility of these offerings,
because it might not look so competitive at lower price points but would sell if
comparisons were properly done to take account of quality. Yet if the comparisons do not
allow for this, it may prefer not to be on the marketplace at all. Other examples are order
fulfilment standards, and security of payment standards applied by marketplaces, which
may not satisfy the brand’s requirements. The brand may well be legitimately concerned
that the platform allows resellers which are frequently out of stock (e.g. advertise
availability of a product to make a sale but only later inform the customer they are out of
stock, and meantime benefit from the cash flow); or who do not meet certain standards of
shipment time, or do not refund customers promptly. It is reputationally damaging for the
brand to be associated with a marketplace where a number of resellers may not meet its
standards, even if it benefits from free search and comparison services.

These are considerations specific to an online multi-sided environment that can create
new conflicts between platforms, consumers and brand owners. If control over standards
remains with the marketplace, and the brand owner as “customer” of the platform has no
control over standards but must take them as given, it may legitimately decide to retain
some control over its distribution by being selective about the sites its resellers are
allowed to use. This may well take the form of an outright restriction on resellers’ use of
certain marketplaces, or restrictions on the type of functionalities that resellers may
allowed to use on marketplaces. For instance, if a platform commits to a particular way of
doing comparisons between products, order fulfilment, payment etc., by setting
standardised terms that cannot be individually negotiated, the brand owner may not want
to be seen to be trading in that particular way and engage in the selective use of
marketplaces, and “platform exclusion” decisions.
Yet we have seen that agencies tend to regard these decisions as a form of anticompetitive
“discrimination” by brand owners across outlets, intended to prevent price competition
and “keep prices high” for their products – and as such, they tend to be seen as “per se”
anticompetitive and “by object” restrictions. An example is the ASICS case in Germany,
where it was deemed anticompetitive for ASICS to restrict resellers’ use of price
comparison websites, and the use of logo/brand on third party platforms. It is always hard
to understand in coherent economic terms why a manufacturer would want to restrict
competition in the distribution of its product – as in traditional environments, the brand
benefits from the distribution of its product being as competitive as possible. The notion
that the motive must be anticompetitive does not seem justified in light of what we know,
and of the efficiency reasons for restricting a channel of distribution.
Uncertainty on the online format and residual control rights

The incentives for introducing a variety of restrictions in an online, multi-sided
environment are amplified by the presence of uncertainties on the online business model, 5
in which case it is natural for the brand to want to preserve more residual control rights
over decisions about how to retail the product – as well as the authority to deal ex post
with any issues that might arise. The ability to make platform selection decisions provides
greater residual control rights as brands try to anticipate the best way of dealing with
multiple channels. This is a typical efficiency-enhancing response to the presence of
uncertainty, when it is not easy to settle on the “right” approach, and unanticipated
contingencies will arise which are hard to write into a contract. The alternative is for the
brand to take distribution “in house” and vertically integrate, and that is indeed a step we
are increasingly seeing brands to be taking. But only a few brands can generate the
economies required to be able to do this, and if they cannot, vertical integration of
distribution is not an efficient model (relative to the economies of scale and scope of
being sold on a platform with other products).
The key point for our purposes is that contractual restrictions between brands, resellers
and platforms naturally arise in multi-sided environments as firms seek to overcome
incomplete contracting problems in the presence of externalities and free riding concerns.
The nature of the externalities and the source of the contractual incompleteness may well
be specific to the multi-sided environment, and there may well be multiple externalities
between various sides of the platform. But the issue remains that aligning incentives
between the different sides directly through a contract may not be possible, and this
requires either incentives to be provided in a different way, or restrictions to be imposed
on prices or product features or availability to deal with externalities.

4. The competition assessment of vertical restraints in a multi-sided environment

appears more complex, but it is not fundamentally different
The assessment of the competition implications of vertical restraints in multi-sided

environments seems inherently more complex: multiple sides, network externalities and
vertical relationships between platform and users potentially imply multiple foreclosure
effects and performing trade-offs seems harder. But again, it is not a fundamentally new
analysis which requires new approaches and new tools relative to more traditional
environments, and it can be considerably simplified – if we focus at least in the first
instance on direct customers on the “pay-side” of the platform, think of the investment in
developing the platform and getting a user base as an investment in “quality” of service
provided on the pay side, and assess the incentives of the platform and its pay customers
in terms of competition between standard vertically integrated and disintegrated players.
Then we can work with the tools we have.
Consider a platform which allows users to search and purchase, while sellers
simultaneously make available their product also on other platforms, their own online
channel as well as brick and mortar outlets (to fix ideas, this is the classic set-up of hotel
booking platforms which have been the focus of extensive antitrust investigation over the
past few years across Europe, but they apply more broadly). There are separate effects
arising from the interaction of platforms with sellers using multiple distribution channels
for their product:
• The seller may pay a commission to the platform on which a sale is achieved, and
this commission is equivalent in practice to an input price that is charged by the
platform to the seller. The higher the commission, the higher the final price of the
product.
• A platform invests in developing efficient algorithms to assist consumer search, in
software to exchange information with sellers, in sales management assistance
and in acquiring and displaying information which might be useful to buyers.
These investments increase the likelihood of successful matching of sellers with
buyers, but are also subject to a free riding problem as consumers might find the
right match on a full-service site but complete the purchase on a no-frills site
where the price is lower. There is thus an incentive for the platform to try to
reduce this free-riding inefficiency by adopting contractual clauses that restrict
sellers from charging lower rates on other platforms (“broad MFNs”). 6
• Platforms also face a vertical inefficiency in the form of free riding by sellers
themselves, making the product available at lower prices through their own direct
sales channels (online and offline). The contractual solution that platforms may
then seek to adopt is a restriction on sellers charging a lower price through these
channels than that quoted on the platform (“narrow MFNs”).
• The contractual “solutions” for the various vertical inefficiencies can also affect
competition between platforms as MFN clauses could potentially dull the
platforms’ incentives to compete by offering lower commissions.
Netting out these effects appears analytically complicated – and multiple modelling
efforts were put forward e.g. in the hotel booking case (with results depending finely on
assumptions about effects such as “cannibalisation” – the extent to which if a hotel
charged a lower price on a platform charging lower commission it would eat into its own
sales where it pays no commission, the ability of hotels to “delist” from sites that charge
higher commission, etc.). But the fundamental reason for the complexity is that there are

multiple parties interacting “upstream” and “downstream”, not that there is something
inherently different arising from multi-sidedness. Indeed it is not clear that
multi-sidedness makes any essential difference to the analysis. What multi-sidedness
implies (again) is that there are search services offered for free on one side of the
platform, on which others can free ride; and these free-riding opportunities mean the
platform cannot get a return from direct search customers and may well seek to introduce
restrictions on prices for the same product sold on other channels. However, we would
have essentially the same issues also with an agency model with in which an “upstream
firm” was selling a product on a platform and setting the final price, while at the same
time selling the product as an input to the platform at a price either negotiated or set by
the platform. In practice there is a set of “vertically dis-integrated” offers (the platform
which provides the “downstream” booking service only) competing with “vertically
integrated” offers (the seller which provides the “upstream” product and competes for
sales with the dis-integrated seller through multiple channels), and this creates additional
trade-offs, but the analysis of competitive effects does not require a change in our
analytical tools: it still requires us to gauge the extent to which simultaneously selling a
product through multiple independent platforms, and through the seller’s own integrated
channels, may give rise to foreclosure incentives upstream and downstream between the
platform and its pay customers.
5. Systematic dismissal of efficiencies is the major outstanding issue
The area where most progress needs to be made – and where tools need to be sharpened –
is the testing of the efficiency motivations for the contractual restrictions that we see.
Competition authorities and the courts have rarely if ever accepted contractual
incompleteness as a motivation for vertical restraints in more traditional environment, and
have not engaged with the task of properly understanding organisational structures and
business models: theories that explain organisational structures and their efficiency
properties are typically dismissed, and this problem has carried over entirely to the multi-
sided environment.
Thus the case against hotel booking platforms has been strongly motivated by a prior that
MFNs/Best Price Clauses imposed by platforms on their suppliers (hotels) to ensure they
were not selling rooms at a discount on other platforms and their own sites were no more
than a form of RPM, intended to increase prices and deter the entry of cheaper platforms.
A number of analyses have been more subtle, 7 but the prevailing view was that booking
platforms somehow “squeeze themselves” between the customer and the hotel, and there
is nothing wrong with customers searching on booking sites and then booking with the
hotels separately (“information on the internet is by its nature free”). The argument that
these restraints are efficient because by increasing the “conversion” of search on the
platform into sales they increase the incentives to invest in search (only search that leads
to booking is rewarded) has been fundamentally set aside. The efficiency motivation have
been systematically “disbelieved” by agencies (“I understand the argument for
efficiencies, I just don’t believe it”). In the more elaborate version of the argument, the
answer has been that there can be no concern about the effect of free riding on incentives
to invest because the investment of the platform are not “specific” to a particular hotel –
thus if there is free riding on the part of a particular hotel, this does not undermine the
incentive of the platform to invest overall.
But it is simply incorrect to dismiss efficiency motivations on these grounds: a website
which involved a material investment to design and launch is not protected from free

riding concerns just because the investment in the technology was not “seller specific”.
Of course it is the case that for free riding to undermine the incentive to invest it must be
the case that the investment is “relationship specific”; but to conflate this with “seller
specific” is a mischaracterisation of the economic insight. What platforms are doing here
is creating a public good for everyone who searches the website, and the investment is
still specific in that sense. When pursuing arguments sourced from the economic literature
we need to be careful to capture their true meaning and substance. What happens on the
platform is a specific investment, because it is all about creating a public good for the
other side of the market.
Similarly, for selective distribution the key is that given the uncertainties of online
selling, brand owners want more residual control rights over decisions about how to retail
their products, and want authority ex post to deal with issues that might arise in an
uncertain environment. It is simply not possible for a competition agency to assess
whether the parties can write a complete a contract or not. A typical reaction is “we don’t
accept your efficiency arguments, because the incentive problem can be solved through a
two part tariff”. But this is incorrect: two-part tariffs can only resolve some types of
vertical inefficiencies, and by no means all. 8
In practice very little progress has been made in developing an understanding of how to
assess the credibility and significance of efficiency motivations for contractual
restrictions of the type considered here. In the hotel booking case the economists advising
the platforms sought to run various experiments to substantiate the claim that in the
absence of the clauses, conversion through the booking platform would decline – which
was at least the first “building block” in an analysis of the potential for free riding
concerns undermining the incentive to invest in the platform in the first place. One
“natural experiment” was made possible by the fact that in Germany the HRS platform
had been banned from using MFNs altogether, and this provided an opportunity for
studying whether this had a material effect in terms of inducing lower conversion rates on
the HRS platform (i.e. fewer bookings relative to searches) once the ban came into force.
Evidence was also collected from platform search and booking data in other countries to
assess whether conversion rates varied with the degree of “price dispersion” – i.e. the
extent to which consumers were more likely to make a booking (“convert” their search)
on the platform when prices for hotel rooms were more uniform, and less likely to do so
when they were faced with greater dispersion of room rates. The experiment was not
“clean” in the sense that MFNs were in place, and therefore the degree of price dispersion
which was observed was only reflecting “lack of adherence” to MFNs. However an
interesting claim was the finding that where price dispersion was higher (i.e. MFN were
not being adhered to), there was a material decline in the probability that customers
would book through the platform, even though they continued to use the search
functionality. This type of evidence gained little traction and was given little weight in the
case.
6. Focus on short term price effects vs dynamic effects has long term costs
The failure to provide a coherent assessment of the competitive effects of these

restrictions in practice has two further causes.
One is the well-known problem of the unhelpful structure of the law, which has separate
steps for (a) finding a restriction of competition under 101.1 and then (b) considering
whether there are offsetting efficiencies under 101.3. This dichotomy completely misses
the economic point that a “restriction” is precisely the means through which the

efficiency benefits are achieved. Separating the analysis into stages, placing the burden of
proof on the parties to prove efficiencies and somehow show they offset the restriction, is
not how we should proceed. Weighing anticompetitive effects against efficiency benefits
is not how our economic theories work. Different is the case of mergers, where we
evaluate the change in incentives while leaving the cost structure unchanged. But
contractual vertical restraints change the incentives to compete in price vs. the quality
dimension, and it is just not possible to separate a price increase motive from an
efficiency motive. The burden of proof on efficiencies is simply impossible to meet.
And indeed, because it is seen as all too difficult to make this “balancing” assessment of
restrictions and efficiencies, there has been a major lurch back towards the use of the
hardcore “object box”, so we do not have to worry about efficiencies at all. 9 In an online
environment all forms of internet retailing are labelled “passive sales”, so that every
restriction one might want to adopt for efficiency reasons can be labelled a violation of
object.
A second factor may be the bias of Industrial Organisation for looking too much at the
details of specific models, and less at the bigger qualitative questions that matter for
policy. Related to this, much of our competition policy advice is that we should get prices
as close as possible to marginal cost at all times. We worry about restrictions increasing
prices in the short term, though we know that higher prices can be good because they
signal profitable market niches and high consumer demand, and direct investments and
entry to where the highest marginal values are. We hamper this market process of
eliciting information about demand with too much focus on static short-run price
competition and too little on market dynamics, yet we have not been particularly helpful
in suggesting evidentiary standards that are implementable in practice. We live by the
legacy of “example economics”: “there is a paper that shows that this practice can be
problematic, we have an intuition things may go this way, so it is better to be prudent”.
If we downplay efficiency arguments, and require companies to show “objective
justification” for a business practice, we are adopting the opposite of a model in which
innovation is driven by experimentation. In traditional industries in which business
format did not change as much with the product, that might not have been that much of a
problem, but with internet retailing and platform markets the freedom to experiment in
sales strategy and business format is much more central. A direct implication is we are
seeing business format change under significant strain in Europe, and a return to vertical
integration into distribution: brands selling increasingly through flagship stores or by
renting shop-in-shop modules in department stores. The purpose is to regain control over
the vertical chain, in an environment in which there is perceived great uncertainty about
what is allowed and what is not in terms of online distribution. Would we have seen so
much vertical integration if firms could control their vertical sales channels via contracts?
Probably not. Firms self-provide distribution services to regain control over their product,
but this development is induced as a reaction to concerns about enforcement in this area,
and may lead to foregoing or restricting forms of innovation that could take place online.
We are in danger of undermining the rate of innovation in this area by yielding to firms
that would like to see competition authorities shift rents to them,
7. Practical analytical map for antitrust Analysis
There is no unique test that can be implemented to assess the potential anticompetitive
effects of vertical contractual restraints in multi-sided environments. And because the
formal analysis can be complicated by effects going in different directions, it will be

important to remain focused on “first-order” economic effects. The first priority in our
view is to establish a framework for conducting the analysis that makes economic sense
and reflects the insights we have from the economics of vertical restraints, multi-
sidedness, online and network effects. We sketch below a possible roadmap.
Interpreting multi-sided markets in a standard vertical framework

While multi-sidedness involves network effects across different sides of the market, this
does not mean that the first-order effects of vertical restraints in such an environment
cannot be analysed with a standard set of analytical tools. With multi-sidedness, the price
on one side of the market typically drops to zero (or generally below marginal cost) in
order to boost demand on the other side (where strictly positive margins are obtained).
Harm to consumers from vertical restraints does not arise (directly) on the “zero-price”
side, and only customers on the other side of the market could be directly harmed (though
this does not exclude the possibility that customers on the zero-price side could be
indirectly harmed, if the platform is a pure intermediary and they purchase from platform
customers on the other side).
But as a first-order approach, we believe the antitrust analysis should focus on customers
who could be directly harmed. This allows a first-cut assessment of the impact of vertical
restraints based on the standard economics of vertical contracting. In this approach, the
size of the customer pool on the “zero price” side of the market can be seen as a “quality
parameter” in the demand function on the other side of the market. Price setting,
advertising, and investments in quality of platform experience for customers on the “zero-
price” side of the market can then be seen simply as aspects of “investments in quality”
in standard vertical models in which retailers set both prices and quality level. The fact
that no margin is made on the zero-price side of the market can be interpreted as an
investment in quality for the other side.
With this framework, the antitrust analysis of vertical contracts in multi-sided markets
can be reduced to a model in which the platform is in effect an upstream firm offering
“contacts” at some prices and quality level, and potential vertical restraints. These can
be accepted or rejected by the customer (the seller) who in turn sets a downstream price
to its own customers (who could be the zero-price customers of the platform itself). The
impact of network effects on the zero-price side of the markets is taken into account in
this approach.
This framework allows for an analysis of vertical restraints in multi-sided environments
which does not fundamentally deviate from the approach we should follow to assess
vertical restraints in more conventional environments. The advantage is to break down the
complexity of multi-sided cases into pieces that are more manageable, and for which an
analytical framework is available and should be familiar to antitrust authorities. The
specificities of multi-sided markets are more likely to be taken into account if we follow a
simplified approach, than if we suggest that everything has to be looked at the same time.
Getting market definition right: multi-homing and substitutability between

levels of the service “stack”
With a standard framework for the analysis of vertical contracting, market definition
should also in principle follow standard rules. However, certain features of digital
markets tend to perpetuate mistakes that are routinely made in defining markets in
vertical structures. This holds especially true for competition “in the vertical stack” and
for multi-homing of customers across supply channels, where the failure to acknowledge

competitive constraints properly leads to market boundaries being too narrow and market
power being overstated for purposes of assessing vertical contracting practices.
First, almost all positive-price customers in multi-sided markets multi-home. They tend to
be sellers to end-customers and will use all distribution channels that can add to their
margins. The key is that with multihoming all distribution channels tend to be substitutes
to some extent. That multiple distribution channels tend to be used in equilibrium is not a
sign that they are complements or independent (which tends to be the standard view).
Selling through more channels is pro-competitive in itself because it reduces the marginal
contribution of each distribution channel to a firm. But since no supply channel can
extract more than its marginal contribution to downstream profits, with more distribution
channels the prices paid by firms for each particular channel will be lower. This effect is
more pronounced, the greater the degree of multi-homing and the greater the transparency
of different offers to the end customers.
Second, and closely related, digitalisation has made it much easier to offer services
through a variety of business formats, both vertically integrated and dis-integrated. The
fundamental innovation of platform markets is precisely that complementary components
to services can “plug-in” to already existing services, facilitating intermediation on any
type of service. Online retailing integrates multiple functions such as product information,
product search and matching/choice, financial transacting, and physical transportation.
These activities involve different costs, and customers typically demand different
mixtures of these activities which are offered in all kinds of combinations, with different
degrees of vertical integration, and often with a mixture of digital and traditional markets.
Thus a firm can make a sale as a result of consumers searching on a price comparison
site, and then clicking through to the firm’s website, or through search and purchasing on
a booking/sale platform; these are substitutes in the economic sense, even though in the
first case the seller pays the price comparison site for the click through, in the second it
pays the platform for click through and fulfilment. Similarly, a brand can reach customers
through a click advertisement on Google Products but also as a result of the customer
searching for the product on Amazon and buying there. In the case of a direct purchase
from the manufacturer the order may be fulfilled through an external contract with UPS,
in the Amazon case through Amazon fulfilment, but in principle these are substitutable
packages.
The analysis ought to start from a description of all channels through which an end-
consumer can be reached, and the departing presumption should be these are potentially
in the same market. However this is not what happens. The analysis often starts with a
description of the “experience” of different distribution channels, to conclude on that
qualitative basis that a number of them can be excluded from “the market”. The simple
argument that the “online experience” is different from the “offline experience” may well
establish product differentiation, but it is not enough to exclude substitution a priori. We
also often find that a distinction is drawn by pointing to the fact that different firms, e.g.
price comparison sites and sites that allow search and booking, do not offer the same
services. But this is incorrect, because what matters is the substitution between the “full
stack” including the price comparison site together with whatever financial transaction
and physical fulfilment solution they offer, and a site which provides an integrated
facility for product search, selection and financial transaction.
Several practical steps should be followed for a proper analysis:
• First, all channels have to be identified through which end-consumers can be
reached by the positive-price customer of the multi-sided platform. All such

channels should be treated as potential substitutes unless there was strong

countervailing evidence.
• Since end-customers drive the incentives for substitution across channels, we
need information on end-consumer behaviour. We should study:
o The degree of multi-homing among end-customers as a first-cut for
substitutability between channels;
o The degree of search among different distribution channels before a purchase.
Do consumers search on Google + specific retailers, Google + brand
manufacturer, Amazon, and physical shopping before they make a final
purchase decision?
o Evidence on (possibly hypothetical) responses to prices or (better) to a
channel no longer being available.
There are multiple survey methods for eliciting quantitative evidence for these drivers of
substitution in an antitrust investigation, where less tight deadlines mean that surveys can
be designed in principle much more carefully than in mergers. End consumers can be
asked about their multi-homing behaviour, their search behaviour the last time they made
a purchase, as well as hypothetical responses to a certain channel not being available, but
clearer standards for such surveys must be developed in particular to capture the
possibility of multi-homing.
Thinking of theories of harm as analytical tools

What is often under-appreciated is that a “theory of harm” in the economic sense is not
just an assertion of expected effects (as the term is often used in law). Instead it is an
analytical tool for case analysis. For instance, a statement that a particular practice “will
deter entry” does not amount to a useful theory of harm that helps the analysis.
Developing an economic theory of harm means specifying a theory that makes clear
which assumptions are necessary to generate the anticompetitive effects. Whether these
assumptions can be validated in the market under investigation will then determine
whether the theory of harm must be dropped, or can be credibly pursued. Often theories
of harm also involve predictions about market behaviour: for example, how pricing
changes as a result of the predicted behaviour. If these predictions are not borne out by
market behaviour, again the theory of harm must be rejected.
A “theory of harm” in the economic sense is therefore a tool to generate the right
questions and identify the relevant evidence. We use it to spell out the precise
assumptions under which there could be anticompetitive effects according to economic
theory, and these assumptions then become what we need to test with data. For example,
in the hotel platform booking cases the conjecture was that MFNs deterred the entry of
cheaper, low-frill platforms that would charge lower commission to hotels. Yet what was
observed in at least one case was that attempts entering new platforms (who complained
against MFNs) set royalty rates exceeding those of existing hotel booking platforms.
Higher royalty rates would have created incentives to raise the end-customer price, but
then the MFNs could not have been binding with respect to the entrants. Entry therefore
could not have failed because of the inability of the hotels to pass on savings from entry
pricing to final customers.
Any analysis should therefore fully spell out a testable theory of harm that clearly
identifies the mechanism through which foreclosure or higher prices would be achieved –
having identified the vertical structure of the market appropriately, and having followed
the correct approach to verifying substitution at the market definition stage. The

framework must be specified before starting the evidence gathering, so that it can
discipline the interpretation of evidence and avoid the conjectural approaches that are
currently most common in complex cases.
Assessing entry conditions

Because markets in the digital economy tend to be fast moving, entry and exit with new
business models at different points in the vertical supply chain are frequent. Failure of a
significant number of entry attempts is normal under entry and exit dynamics, so that
observed exit can neither be an argument for high entry barriers or foreclosure. Neither is
the existence of network effects, which is inherent in multi-sided markets, sufficient to
presume entry is difficult. We have seen a number of services, for example ride sharing,
in which the initial entry by Uber has been imitated multiple times – including with app
based services from incumbent taxi companies.
Furthermore, network effects on the customer side can be easily overcome in multi-sided
markets in which firms adopt platform models. Essentially it becomes easy to enter when
a company already has a large customer base in related activities. There are countless
examples of this: think of the shift of Tripadvisor from a travel advice and comment
provider into a hotel price comparison site (later also with its own hotel bookings
offering). Thinks of a service like “dinner boxes” (recipe choice online, plus ordering on
the internet, and home delivery); we have seen entry in this market in the form of de novo
entry, supermarkets branching out to cover such offerings, as well as a recipe provider
like the magazine “Bon Apetit” teaming up with independent food providers to develop
similar services in a vertically dis-integrated model, but based on its network of existing
customers.
Thus while de novo entry may be possible, there can be many entry channels – vertically
integrated or dis-integrated. This means that entry analysis to assess the likelihood of
vertical foreclosure must systematically assess the capabilities of firms in related markets
to expand their activities and use their customer base to introduce a competing offer. We
cannot just look at vertically integrated entry, but need to assess entry also in parts of the
vertical chain that can eliminate bottlenecks of individual access. Sometimes individual
firms cannot effectively use services due to economies of scale – but in these cases
intermediaries often enter that provide these economies by aggregating many small firms.
Entry analysis should therefore have four elements:
• Avoid a narrow focus only on de novo entry;
• Track the entry experience in the market so far, with emphasis on different paths
of entry;
• Identify firms with an existing consumer base and assets in adjoining activities
that could expand through imitative entry;
• Analyse entry failures with a view to whether they can be explained by a lack of
innovative differentiation from existing offerings.
Evaluation of efficiencies, and consideration of the counterfactual

The most important issue in the analysis of efficiency claims is that a shift in attitude is
required on the part of competition authorities. Firms in the main adopt vertical restraint
to deal with problems they face in implementing business strategies when dealing with
retailers – not because of anticompetitive objectives. As explained the reason lies – as in
virtually all organisational forms (including outright ownership) – in the difficulties of

writing complete contracts on all aspects of the actions of the contract partners. These
business reasons need to be seriously engaged with by competition agencies, but currently
they are not. Efficiency claims are routinely dismissed with reference to some contract
that the firm could theoretically write that would eliminate the problem: for instance, that
a contract could in fact be written that conditioned on the very variable with respect to
which the contract is incomplete; or that all contracting problems could be solved with
two-part tariffs.
These claims are not economically justified (just as the claim that “free riding problems
do not exist”). There is ample evidence from everyday life and from the economic
literature that (a) free riding is particularly pervasive in digital environments because its
costs have declined, (b) the predictions of incomplete contracts theory explain shifts in
ownership and contract structure in a multitude of markets. Furthermore, the theoretical
literature makes clear that two-part tariffs solve incentive problems only in a non-generic
set of cases, and they fail whenever firms in a contracting environment are not risk
neutral. A first step in the analysis of efficiencies of vertical restraints should be for these
simple principles to be acknowledged by competition authorities.
Second, we should not be asking firms to prove a negative: that there is never any other
possible contract that could possibly have the same effect on resolving the contracting
problem, but may not have potentially some anti-competitive effect. It is obvious that this
will not be possible. Firms are required by precedent to show “objective justification” for
a practice, but if what is “objective” is an entirely subjective assessment by case teams
with strong priors, there is risk for firms whose vertical restraints have in practice no
anticompetitive effects.
The basic issue is that the standards for proving efficiencies have been made impossibly
high, while the standards for proving infringements are much lower. Of course it is
entirely reasonable that to prove an infringement one does not have to show actual effects
in many cases. This would be an impossible standard and would end effective
enforcement. Quite reasonably the standard has been set to “likely effects”, which can
then be proven by a coherent theoretical framework and evidence that it applies (or even
evidence that quite regularly in similar circumstances there have been anticompetitive
effects). As there is little evidence for strong and widespread anticompetitive effects of
vertical restraints, this is in practice a very low standard of proof – even if it is a
reasonable one. However, it is then fundamentally wrong to set an impossibly high
standard of proof for efficiency defences.
We therefore propose that efficiencies should be treated to the same standard as
anticompetitive effects:
• There should be a clear theory for why the vertical restraints have been adopted ;
• The assumptions of the theory should hold in the particular market; and
• The predictions of the theory should be more consistent with the facts of the case
than the anticompetitive theory the competition authority pursues.
In practice this would mean that the burden of proof for the efficiency defence should
depend on the strength of evidence for the theory harm. For example, if a theory of
entry-deterring effects is found to be inconsistent with the pricing behaviour of entrants,
the efficiency explanation for the behaviour should gain greater weight.
Overall, the priority for the foundation of a more effective assessment of efficiency
defences does not lie in new techniques of analysis, but in creating standards of proof
for efficiencies that can actually be met, and that are nothing more than the

equivalent to the low standards which are routinely applied to “prove” likely
anticompetitive effect.
8. Conclusions
Economic analysis has failed to inform a rational policy towards vertical restraints in
Europe, and this basic failure is carrying over to multi-sided environments. We have
argued in this paper that the appropriate response is not to call for a separate toolkit for
the analysis of vertical restraints in multi-sided markets. On the contrary, most multi-
sided markets can be reinterpreted for the purposes of analysis in antitrust cases as
a standard contracting problem in vertically related markets.
Most progress can therefore be made if we are able to adopt a simple structure of analysis
that should be in principle familiar, but is not rigorously applied even in standard vertical
cases. Our recommendations for the analytical framework is therefore not to focus on
adapting techniques, but on the approach to the analysis. Just some improvements in
approach to market definition and a systematic use of the assumptions and implications of
theories of harm would lead to a much more reliable analysis of vertical restraints cases.
The call for new techniques may in part be a symptom of Industrial Organisation looking
too much at the details of specific models and less at the bigger qualitative questions,
which features of markets are important when considering policy intervention. It is not
enough to tease out and try to trade off every conceivable effect of best price clauses, for
instance, if these insights are not embedded in an investigative procedure that allows
relevant and irrelevant theories to be distinguished from each other. It is unimportant that
“there are models” showing anticompetitive effects, the key is whether such models need
assumptions that tightly map into the market circumstances of the case. This is something
we do not have enough clarity about (and discipline) in practice. The priority is to make
sure that investigations put a process into place that makes the applicability of a specific
theory directly testable, and makes this a stringent requirement – rather than relying on
general “findings” and theoretical result in the literature to justify a prior.
Notes
1 See also Kühn, K.U., “Economic Deficits in the Competition Policy Analysis of e-
commerce: is the Current Enforcement Practice Justified from An Economic Perspective?”,
in Competition Law and Policy Debate, Volume 2, Issue 2, June 2016.
2 For a broad overview see among others the classic Rey, P. and T. Vergé, 2008, “Economics
of Vertical Restraints”, in P. Buccirossi, Ed, Handbook of Antitrust Economics, MIT Press,
pp. 354 – 390.
3 See, Lafontaine, F. and M. Slade, 2008, “Exclusive Contracts and Vertical Restraints:
Empirical Evidence and Public Policy”, in P. Buccirossi, Ed, Handbook of Antitrust
Economics, MIT Press, pp. 391 – 414.
4 MacKay, A., and Smith, D.A., 2016 “The Empirical Effects of Minimum Resale Price
Maintenance”, Kilts Center for Marketing at Chicago Booth – Nielsen Dataset Paper Series
2-006, at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2513533.
5 For an analysis of the importance of choosing the right “business model, see Rochet, J.C. and
J. Tirole, 2003, “Platform Competition in Two-Sided Markets”, Journal of the European
Economic Association, 9:4, pp. 990 – 1029.

6 See inter alia Johnson, Justin P., The Agency Model and MFN Clauses (January 25, 2017).
Available at SSRN: https://ssrn.com/abstract=2217849 or
http://dx.doi.org/10.2139/ssrn.2217849 and Boik, A.K. and K.S. Corts, 2013, “The Effects of
Platform MFNs on Competition and Entry, Research Paper, available at
https://www.researchgate.net/profile/Andre_Boik/publication/305220937_The_Effects_of_P
latform_MFNs_on_Competition_and_Entry/links/5785173408ae3949cf5384ee.pdf
7 See inter alia Fletcher, A., and Hviid, M., Retail Price MFNs: Are they RPM ‘at its Worst’?,
ESRC Centre for Competition Policy, University of East Anglia, April 2014.
8 See for example Rey-Vergé (2008). Ibid.
9 See e.g. Pierre Fabre judgment ECJ 2011, which deems selective distribution an object
restriction in the absence of “objective justification’.

Rethinking Antitrust Tools for Multi-Sided Platforms 2018
This report investigates how competition agencies can respond to the challenges posed by the multi-
sided nature of platform markets, which are particularly common in the digital economy. It asks whether
the antitrust tools that are traditionally used to define markets, to assess market power and efficiencies,
and to assess the effects of exclusionary conduct and vertical restraints, remain sufficient to address
those questions in the context of multi-sided platform markets. It then proposes how these tools might be
redesigned or re-interpreted in order to equip competition agencies with the tools they require when
analysing these markets.
www.oecd.org/daf/competition
This publication is a contribution to the OECD Going Digital project, which

aims to provide policymakers with the tools they need to help their economies
and societies prosper in an increasingly digital and data-driven world.
For more information, visit www.oecd.org/going-digital.
Making the transformation work
#Goingdigital for growth and well-being

OCDE Rethinking Antitrust Tools For Multi Sided Platforms 2018

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for Multi-Sided Platforms

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

4. Measuring market power in multi-sided markets .................................................................... 87

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

8. Network effects and efficiencies in multi-sided markets ........................................................ 189

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

Part I. Introduction and key findings

1. What are multi-sided markets? Why are they different?

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

Box 1. Summary on the nature of multi-sided markets

There are various definitions of the multi-sided markets in which multi-sided

How many markets to define?

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

it). In cases where platforms compete in non-transaction markets, he suggests defining

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

How to define the market(s)?

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

Box 2. Summary of key considerations for market definition

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

• A SSNIP test should check the profitability of an increase in price on each

When measuring the market power held by a multi-sided platform, it is important to

Tools based on the responsiveness of demand

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

misunderstanding as to the closeness of competition between two firms. Where cross-

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

Box 3. Summary of key considerations for market power

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

Why is exclusion a greater concern?

How do the tools need to change?

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

Box 4. Summary of key considerations for exclusionary conduct

As in one-sided markets, the effects of potentially exclusionary conduct, such as

Why are efficiencies more likely in multi-sided markets?

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

How do the tools need to change?

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

Box 5. Summary of key considerations for efficiencies

Vertical restraints in multi-sided markets can be imposed either by platforms on users

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

Are vertical agreements a greater concern in multi-sided markets?

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

How do the tools need to change?

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

Box 6. Summary of key considerations for vertical restraints

As in one-sided markets, the effects of vertical restraints need to be assessed on a case-

1 Armstrong (2002), Evans (2003), Wright (2004).

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

Wright (2004), “One-sided logic in two-sided markets” Review of Network Economics.

RETHINKING ANTITRUST TOOLS FOR MULTI-SIDED PLATFORMS © OECD 2018

Part II. Market definition